If you have a VA loan now, you have the option to refinance with the VA IRRRL program. You don’t need to verify your income, assets, credit score, or home value for this loan, but it’s not the right choice for everyone. As a veteran, you do have other choices when you want to refinance. Keep reading to learn about them.
What is the VA IRRRL Refinance?
First, let’s understand the VA IRRRL refinance. As we already stated, qualifying is simple. As long as you have a VA loan now, live in the home, and you are current on your payments, you may qualify for the VA streamline refinance. The only other stipulation is to prove that you benefit from the refinance. Typically, this means:
- A lower payment
- A lower interest rate
- A shorter-term
- A less risky term (fixed rate instead of an ARM)
You can’t take cash out of the home’s equity with a VA streamline refinance. You may only refinance the outstanding principal balance of your current mortgage plus any allowed closing costs. You may not receive any cash in hand.
The VA Cash-Out Refinance
If you need money from your home’s equity, you can use the VA cash-out refinance. While still a VA loan, this refinance program requires full verification of your qualifications. You can borrow up to 100% of the home’s value, according to the VA, but each lender has its own requirements, some of which require lower LTVs to lower the risk of default.
In order to qualify for the VA cash-out refinance, you must:
- Have a stable credit history (the minimum credit score varies by lender)
- Have stable income and employment
- Live in the home as your primary residence
- Have a timely mortgage payment history
- Have a total debt ratio that doesn’t exceed 41%
Lenders will verify all aspects of your VA cash-out refinance loan application. They need to know that you are not a high risk of default, since the loan amount is higher than your current outstanding balance.
FHA loans are an alternative to the VA streamline refinance, but not necessarily a good option. The FHA charges upfront mortgage insurance, plus annual mortgage insurance, which the VA doesn’t charge. The FHA loan may cost you more in the long run as your payments will likely be higher.
Qualifying for an FHA loan is a little more flexible than any other loan program, though, which may make it a viable option for you. FHA loans require:
- 580 credit score
- 31% housing ratio
- 41% total debt ratio
- Stable income and employment
- Timely mortgage payment history
- Proof that you live in the home as your primary residence
With an FHA loan, though, you can only borrow up to 85% of the home’s value, not 100%, like you could with the VA loan.
Conventional Loan Refinance
One more option is the conventional loan refinance, which can be cash-out or a rate/term refinance. Conventional refinances have the toughest requirements, but they don’t charge upfront mortgage insurance, which could save you money on your closing costs.
If you choose the cash-out refinance option, you’ll need:
- A credit score over 700
- 28% housing ratio
- 36% total debt ratio
- stable income and employment
- Timely mortgage payment history
Conventional loans typically allow LTVs up to 80% – 85% on a cash-out refinance. Keep in mind, though, if you borrow more than 80% of the home’s value, you will owe Private Mortgage Insurance, which the mortgage company charges on a monthly basis.
If you don’t need cash out of the home’s equity, you may find slightly more flexible guidelines for a rate/term refinance with a conventional loan, but you still want to keep the LTV below 80% to avoid the PMI charges.
If you have equity in your home and don’t want to touch your first mortgage, you also have the option of a home equity loan or home equity line of credit. Both are second mortgages that use your home’s equity up to 85% of the home’s value. The home equity line of credit and home equity loan differ slightly:
- Home equity line of credit – You receive a credit line for the maximum loan amount. You can draw the funds as you need them via check or debit card. You pay interest on the money you withdraw, but not the amount you don’t use. You can use the funds (after repaying them) repeatedly for the first ten years of the loan. After the first ten years, you pay back principal and interest for the next 20 years.
- Home equity loan – You receive your loan amount in one lump sum. You immediately make principal and interest payments on the full amount and typically have a fixed interest rate. You cannot ‘reuse’ the funds even when you pay back the principal.
You have many options when refinancing your VA loan. We suggest that you look at all of your options and compare the bottom line. How much will the loan cost you in the end? Look at the total cost of interest and closing costs. Also, look at the cost of any mortgage insurance you have to pay for any of the loans. Comparing the ‘big picture’ will help you decide which loan works best for you.