Sometimes after originating a VA loan, you want to refinance it. Some borrowers want to do so because they need cash out of the home’s equity. Others want to do so to lower the interest rate and save some money. Whatever your reason, there are a few things you need, good credit, a decent debt ratio, and the right LTV.
Just what is the right loan-to-value ratio for a VA refinance? It really depends on the program you use. We will cover each of them below.
The VA IRRRL
The VA IRRRL is the Interest Rate Reduction Refinance Loan. As the name suggests, you use this program to reduce your interest rate. You may also use it if you want to change your loan’s term, whether from an ARM to a fixed rate or from a 30-year to a 20-year loan. You cannot use this program to take cash out of the home’s equity, though.
In exchange for the benefit of lowering your interest rate or reducing the loan’s term, there is very little verification you must provide the lender. They don’t need to check your credit score, income, or even the value of your home. The lack of need for an appraisal is perhaps one of the largest benefits of this program. Essentially it means you can have more than 100% LTV and still refinance.
Lenders don’t have to worry themselves with the value of your home because the VA enforces the need for a net tangible benefit. They also enforce a timely mortgage payment history. Typically, they want the last 12 mortgage payments made on time. They may grant an exception for one 30-day late payment if it was at least more than 3 months ago.
The VA believes that if you have a timely mortgage payment history with the higher loan payment or more risky loan type (ARM or longer term), that you’ll be able to comfortably make the lower payment. In fact, they see it as a benefit because lower payments are easier to make. If you took the benefit of the fixed rate over an ARM, there’s less risk of default because fixed rate loans don’t adjust.
For the VA IRRRL there really isn’t a magic LTV number. Most lenders won’t even know your LTV unless they run an automatic valuation on the home. Many don’t bother because it doesn’t play a role in the loan’s approval. Those lenders that do care may run it. If you run into this situation, you can always shop around for lenders that don’t focus on the loan-to-value ratio.
The VA Cash Out Loan
The VA cash-out loan is different than any other cash-out loan out there. The VA allows an LTV of up to 100% for a cash-out loan. Most loans, such as the conventional loan, only allow up to 80% and FHA loans allow up to 85%.
The VA cash-out loan does require that you prove you can afford the loan though. With this program, you don’t have to prove any type of net tangible benefit – the benefit is taking the cash out of your home’s equity and using it as needed. The payment will increase and the interest rate might increase as well, since it’s a larger risk for the lender.
You’ll have to prove that you have good credit, a decent debt ratio, and enough stable income to cover the loan. The lender will have to go through a more rigorous approval process for this loan, but again, you can have up to a 100% LTV.
So what’s the magic number for an LTV on a VA loan? There really isn’t one – but the lower the loan-to-value ratio, the better your chances of approval. Lenders can add their own requirements onto the VA’s requirements. This means they can have ‘stricter requirements,’ than the VA requires. Some lenders may focus on your loan-to-value ratio, trying to avoid giving loans to borrowers that would be upside down on their loans or even those that are close to 100%.
If you continuously refinance when your LTV is high, you will never get ahead of the game. In other words, it will be hard for you to build equity in the home. If you refinance with the IRRRL, you at least have to have a benefit for the refinance. Hopefully, that benefit is a lower payment, making the loan more affordable for you. The idea is to lower your LTV and start gaining equity in your home so that you can eventually own it free and clear.