5 Tips for Refinancing a VA Loan
With record-low interest rates over the past couple of years, you may have considered refinancing to get a lower monthly payment or some cash to fix up your home.
But how does refinancing for veterans work, and how does it translate regarding VA loans? If you’ve been thinking of refinancing a VA loan, keep reading to discover five tips to help you get the most out of your refinance.
Eligibility for Refinancing a VA Loan
Before you even consider refinancing a VA loan, you must double-check to see if your current loan is eligible. Lenders evaluate several factors. These can include your credit score, income, any service requirements and debt-to-income ratio.
Credit Score and Income
When shopping around for a lender to refinance your VA loan, you’ll typically encounter a minimum credit score requirement of 620. However, if your score falls slightly lower than that, there’s no need to stress.
The credit score requirement can range between 580-640 depending on the lender. So if you strike out with one company, you can keep looking until you find one that accepts your credit score and can assist with refinancing your VA loan.
Similar to the varying credit score requirements, the income requirements to refinance a VA loan will depend on each lender as well.
To refinance your VA loan, you must fall under a specific category. This includes being an honorably discharged veteran, active-duty or a spouse of an active duty service member or veteran.
If you happen to be a widow or widower of a veteran, your spouse must have passed away during a service-related incident or in the line of duty. Additionally, you must also be unmarried at the time you request a VA loan refinance. However, this only applies if you wish to receive an Interest Rate Reduction Refinance Loan (IRRRL).
Debt-To-Income Ratio and Other Potential Requirements
The typical requirement for your debt-to-income ratio (DTI) is for it to calculate at 41 percent or lower. However, similar to credit score and income requirements, you may be able to find a lender who accepts a higher DTI.
Of course, accepting a higher DTI comes with additional caveats such as your payment history, savings and credit score.
Some lenders may require your home to meet minimum property standards for approval. In these situations, a lender will employ a VA-approved appraiser. This is to estimate your property’s market value and ensure it meets the safety, structure, and sanitary requirements.
Determine The Best Refinance Loan Option
While there are several options for an initial VA loan, there are only two options for refinancing.
Streamline Refinance or IRRRL
First, you have a VA streamline refinance, which is also known as an IRRRL loan. Unlike a cash-out refinance, an IRRRL loan is beneficial if you want a lower interest rate or transition to a fixed-rate mortgage.
To qualify for this loan, you must have a VA mortgage, and the new rate must be lower than what you currently have. The one exception regarding the rate is if you’re refinancing from an adjustable-rate to a fixed-rate mortgage. Additionally, you must be able to present the Certificate of Eligibility from the VA loan you wish to refinance.
The benefit of this refinance is that, unlike most refinance options, it doesn’t require the home to be your primary residence. Also, you don’t need to shell out thousands because you can include any closing costs into the refinance.
So if you transfer to another station, this option presents the opportunity for you to keep your home without actually living it.
Cash-Out Refinance For Veterans
Choosing a cash-out refinance is an excellent option for veterans who wish to tap into their home equity. Unlike an IRRRL loan, you can choose this option even if you have a conventional loan.
For this type of refinancing, lenders will typically require a VA appraisal. As mentioned earlier, this is to get your property’s estimated market value and confirm that your home meets the minimum standards. Additionally, this property must be your primary residence, and you must qualify for a VA Certificate of Eligibility.
The general rule of thumb is that the total amount you can refinance will be up to 100 percent of the appraisal value. While you must pay all the closing costs up front, you have the option to use some of the equity from the loan as payment.
Consider Additional Costs
A VA refinance loan comes with similar closing costs and other fees that you would find with a conventional refinance. However, you must be aware that VA refinance loans also come with a VA funding fee.
The total funding fee amount for your refinance takes several factors into consideration. It looks at whether your loan is VA-backed or VA direct, the entirety of the loan amount and the refinance loan type. It’s always best practice to determine if the lender adds on any other costs such as interest on the loan.
There is some good news if the fee deters you from considering a VA refinance loan. If you fall into one of three categories, you’ll be exempt from paying the VA funding fee. These include:
- Active duty service members who receive a Purple Heart
- Surviving spouses of members who passed away in the line of duty
- Suffering from a service-related injury or disability
The number of times you can refinance your VA loan with either option is limitless. However, you must undergo a certain waiting period before applying to refinance again. For example, you must wait at least 210 days from the first payment on the loan and make six consecutive monthly payments.
Gather Required Documents Ahead of Time
Before starting the application process, it’s beneficial to inquire what documents you’ll need to gather. Worst case scenario, there’s another hard pull on your credit because time ran out while you were scrambling to gather any documents.
If you decide a cash-out refinance is the right option, your lender may request several documents in addition to pay stubs, at least two years of tax returns and any W2s.
IRRRL loans require a Certificate of Eligibility. Specifically, the one you used to get the VA loan you’re trying to refinance.
Take Control by Refinancing a VA Loan
Refinancing a VA loan doesn’t have to be complicated. Get in touch with an Titan Mutual Lending VA Lending Specialist to see how we can help you take control of one of your most significant assets.
If you know anyone that’s fallen on hard times or is transitioning from the military with no place to sleep, a veteran association may be able to help. Ones like the Veterans Association of America check for eligibility and help veterans requiring housing accommodation.