Mortgages backed by the Department of Veterans Affairs come with money-saving benefits for qualified military families, from competitive interest rates to 0% down payments. And in some cases, beneficiaries stand to save even more through VA loan refinancing.
Whether you’re looking for better terms on your existing VA home loan or you want to refinance your conventional mortgage into a VA loan, there are a few things you should keep in mind before applying. Here’s everything you need to know about VA mortgage refinancing, from loan fees to eligibility requirements.
[Read: Best VA Loans.]
Types of VA Refinance Loans
There are two types of VA-backed refinancing loans: an interest rate reduction refinance loan (also known as a streamline refinance or IRRRL) and a cash-out refinance loan. Compare your options in the table below:
|VA Streamline Refinance (IRRRL)||VA Cash-Out Refinance|
|Primary purpose is to change your mortgage rate and monthly payments.||Primary purpose is to take cash out of your existing home equity.|
|Can also be used to switch from an adjustable rate to a fixed rate.||Can also be used to replace a conventional mortgage with a VA loan.|
|Only available for current VA-backed mortgages.||Available for VA and non-VA home loans.|
|VA funding fee is 0.5% and may be rolled into your new loan.||VA funding fee is 2.3% for the first use and 3.6% for subsequent uses but must be paid upfront.|
|Does not need to be used on a primary residence.||Must be used on your primary residence.|
When to Choose a VA Streamline Refinance
VA streamline refinancing is when you borrow an IRRRL to replace your existing VA-backed mortgage with a new one that has different repayment terms.
You can use an IRRRL to lower your interest rate, monthly payments or both. You can also switch from an adjustable-rate mortgage to a fixed-rate mortgage. However, you can only use a streamline refinance if you already have a VA loan.
When to Choose a VA Cash-Out Refinance
VA cash-out refinancing allows you to tap into your home’s equity in a cash lump sum that can be used as you see fit. The funds from a cash-out refinance are often used to pay off debt, finance college costs or make home improvements.
Additionally, VA-backed cash-out refinance loans may be used to switch from a non-VA loan, such as a conventional mortgage, to a VA loan.
[Compare: Mortgage and Refinance Rates in Your Area.]
VA Loan Refinancing Eligibility Requirements
When you refinance into a new VA loan, you’ll go through a private bank, mortgage lender or credit union to do so. Each lender has its own set of eligibility requirements, but there are some general qualifications you should keep in mind:
— Military service. VA refinancing is a benefit for active-duty service members and honorably discharged veterans, as well as their spouses.
— Certificate of Eligibility, or COE. This document from the VA verifies that you meet the service requirements to qualify for a VA refinance loan.
— Credit score. The minimum credit score for VA cash-out refinancing is typically around 620, but some lenders are more lenient. Lenders may or may not require a credit check for a streamline refinance.
— Debt-to-income ratio, or DTI. Your DTI is your monthly debt payments divided by your gross monthly income. Mortgage lenders usually like to see a DTI ratio of 43% or lower.
— Home appraisal. The VA requires an appraisal for cash-out refinance loans, but you may not need one for a streamline refinance, depending on your lender.
Additionally, you may be asked to provide documents to verify your identity and income, such as copies of your pay stubs, W-2s and federal income tax returns.
How to Apply for a VA Loan Refinance
1. Determine your refinancing goal. For example, if you want to lower your monthly payments on an existing VA loan, you’ll choose a VA streamline refinance. Or if you want to switch from a conventional mortgage to a VA loan, then a cash-out refinance is the right choice.
2. Shop around to compare lenders. Most lenders will let you see your estimated repayment terms with mortgage preapproval, which may require a hard credit inquiry. You can compare offers from multiple lenders within a 45-day window to reduce the negative impact to your credit score.
3. Choose the best loan offer for your goals. In addition to your estimated interest rate, you should also consider the annual percentage rate, or APR. This is the total yearly cost of the loan, including interest and fees. You may also want to read customer reviews to determine whether a lender will be a good long-term fit.
[Read: Best Mortgage Refinance Lenders.]
4. Gather the necessary documents. You can use the Certificate of Eligibility from your original VA purchase loan application, or your lender may be able to request a new one electronically through the VA Home Loan program portal. If this is your first VA loan, you may need to request a COE from the VA directly.
5. Work with your lender during the closing process. The lender will reach out for any necessary documents and begin the appraisal process, if necessary. You’ll pay a VA funding fee at closing — depending on the type of refinance you choose, these costs may be due upfront or they may be rolled into the loan.
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Everything You Need to Know About VA Loan Refinancing originally appeared on usnews.com