If you have a VA loan now, you may have the option to refinance it. This could mean one of two things. You could take a cash-out refinance, which taps into your home’s equity and gives you cash in hand. You could also refinance the rate and/or term of the loan, leaving the equity untouched. The latter option is called the VA IRRRL. It’s the simpler of the two programs. However, both programs provide the chance to refinance your mortgage and get what you need.
What is the VA IRRRL?
The VA IRRRL stands for the Interest Rate Reduction Refinance Loan. As the name suggests, it’s a way for you to lower your interest rate on your loan. In other words, it’s a way for you to save money on your loan. Borrowers that took a higher interest rate than today’s rates often benefit from this program. Even those that don’t want to lower their interest rate, but want to get out of an adjustable rate term may benefit.
The VA IRRRL program requires very little from you. The VA relies on the fact that you were already approved for a VA loan. They allow lenders to use most of the qualifying factors from that loan for the refinance. The lender doesn’t have to pull your credit, verify your income, or determine the value of your home. Again, this is all according to the VA. The lender may choose to verify one or more of these items just to make sure you are a good risk.
So what does the VA rely on to ensure that you are a good risk? They look at your housing payment history. In their eyes, if you can afford your higher mortgage payment and pay it on time, there’s no reason you can’t afford the lower payment.
There is a discrepancy in this theory, though. If you refinance to get out of an ARM, for example, your payment may not decrease. In fact, it may increase, depending on the market at the time you refinance compared to the introductory rate you paid. If it doesn’t increase more than 20%, you should be eligible for the program. The VA has determined that this threshold still allows for fewer defaults despite the fact that there is very little verification.
If, however, your payment increases more than 20% or you want to take cash out of your home’s equity, it’s time to look at the VA cash-out refinance.
What is the VA Cash-Out Refinance?
As the name suggests, the VA cash-out refinance gives you access to the cash in your home’s equity. Unlike the VA IRRRL, you will have to verify all aspects of your loan application. In other words, you’ll verify:
- Your credit score
- Home value
Where the VA cash-out refi stands out, though, is the maximum loan-to-value ratio it allows. Borrowers can take out as much as 100% of the home’s value. Here’s how that looks:
Joe’s home is worth $350,000. Joe currently has a VA loan outstanding with a value of $275,000. This leaves $75,000 available in home equity. As long as Joe qualifies based on his income and debt ratio, he may be eligible to take out the full $75,000 in cash.
Of course, you must prove you qualify for the loan amount you request and that you can easily pay it back. The VA doesn’t put a lot of focus on your debt ratio, but it does play a role. They also look at how much money you have left after you pay your mortgage and other responsibilities, such as credit card or car payments. If the amount you have left (disposable income) doesn’t meet the VA’s thresholds, you may be limited on the amount of cash you can take out of the home.
The Differences Between the IRRRL and Cash-Out Refi
As you can see, there are two main differences with the VA cash-out refinance and the VA IRRRLL:
- The amount of documentation you need
- The amount of money you can borrow
If you take the VA IRRRL program, you can only refinance the outstanding balance of your current loan plus any allowed fees. These fees may include energy efficient changes up to $6,000; the VA funding fee; and any approved closing costs. Under no circumstances, however, can you receive any cash in your hand. Any money you borrow must go towards the loan in one way or another.
The cash-out refinance, however, allows you to do whatever you want with the cash left over after you pay your original loan off and cover the closing costs. The VA doesn’t specify what you can do with the funds or how you must use them.
The VA cash-out refinance is harder to qualify for only because you have to re-verify all of your information. If your loan amount will be significantly higher than your current loan amount, you will have to watch your debt ratio, making sure that your income covers the loan and any other existing debts you have.
Both VA programs are a great way to take care of your finances. Whether you want to lower your mortgage payment with the VA IRRRL program or tap into your home’s equity with the VA cash-out refinance, you can get the help you need with a VA approved lender.