Refinancing your current mortgage into a VA loan can be a smart move if you’re an active-duty member of the military, a veteran or an eligible spouse. Fortunately, meeting the criteria to refinance your mortgage into a VA loan isn’t overly difficult provided you meet the military service requirement and lender criteria.
What is VA mortgage refinance?
A VA mortgage refinance is a home loan product backed by the Department of Veterans Affairs (VA). It lets you swap your current loan for a new one, but with different terms. Depending on the type of loan you select, you may be able to get a lower interest rate, change the loan term or convert your home equity into cash.
A VA mortgage refinance differs in some key ways from a conventional mortgage refinance. For starters, the minimum credit score requirement may be slightly lower than you’ll find with conventional loans. The interest rate is generally more competitive as well. Also, conventional loans usually mandate that you take out private mortgage insurance (PMI) if you have less than 20 percent in equity in the home; VA loans don’t require you to have it.
However, a VA loan does come with a funding fee that you won’t find with conventional loans.
Who qualifies for a VA mortgage refinance?
As the name implies, VA mortgage refinances are available to members of the U.S. military. More specifically, here’s what you’ll need to qualify for a VA mortgage refinance:
- Service: Generally, you become eligible for a VA home loan once you have completed 90 days of active-duty military service during a named conflict, six years of service in the National Guard or Reserves, or 181 consecutive days of active duty during times of peace. If a veteran, you must have been honorably discharged to qualify, unless you meet certain exceptions. You might also be eligible for a VA loan if you were married to a service member who died in the line of duty or as a result of a service-related disability.
- Income: Borrowers also need to show sufficient income to repay their loans, although the guidelines for approval are generally easier to meet than those of conventional mortgages. You’ll also need a debt-to-income (DTI) ratio that’s acceptable to the lender: a rate of 41 percent or lower is the usual standard, although some lenders have looser DTI guidelines.
- Credit score: The VA doesn’t set minimum credit score guidelines. But generally speaking, you’ll need a credit score of at least 620 to be approved for a VA loan or a VA loan refinance (exception: Interest Rate Reduction Refinance Loan, or IRRRL, which doesn’t require underwriting). Be mindful that some lenders have overlays (more stringent requirements) and may require a higher credit score.
- Other Criteria: VA home loans require a Certificate of Eligibility (COE) that proves your military service. You also have to agree to occupy the home as your primary residence.
What are the benefits of refinancing with a VA loan?
The benefits of refinancing your mortgage with a VA loan are plentiful, which is why VA home loans are so popular among those who can qualify. VA loans don’t require a down payment, whereas another government-backed loan, the FHA home loan, requires at least 3.5 percent down. However, you’ll still need to be prepared to pay refinance closing costs.
Here are the other key advantages of refinancing with a VA loan:
- No mortgage insurance requirement: VA home loans do not require the borrower to pay mortgage insurance on top of the monthly mortgage payment, even with no down payment.
- Minimal upfront costs: VA loans typically charge a funding fee that the borrower pays upfront, which can be wrapped into the closing costs when you refinance. (If you choose this option, you’ll be financing these costs, so you’ll pay more in interest.) You can avoid paying the funding fee altogether if you are living with a service-related disability and meet specific requirements, or if you are the surviving spouse of a veteran who died in service or from a disability resulting from military service.
- Save on interest: VA home loan rates are generally competitive, and often lower than what you might qualify for with a conventional refinance. Run the numbers though to calculate potential savings — some homeowners actually pay more in interest when they refinance and reset the loan term, even with a reduced rate.
- Flexible qualification criteria: The relaxed credit and income requirements on a VA loan make qualifying easier. (Note: The eligibility guidelines are more stringent for VA cash-out refinance loans).
- No prepayment penalties: Like many other loans, with a VA loan, you can pay off your home early if you want without having to worry about added fees or “gotchas.”
Potential for a predictable monthly payment: If you’re currently in an adjustable-rate loan, you can switch to a VA fixed-rate mortgage to get a predictable monthly payment.
How to refinance into a VA loan
There are two main options available to you when you choose to refinance with a VA loan:
- Interest Rate Reduction Refinance Loan (IRRRL): available to current VA loan-holding homeowners looking to secure a lower interest rate
- VA cash-out refinance: lets any mortgage-holder swap out a current home loan with a new one and tap into the equity they’ve built up
Interest Rate Reduction Refinance Loan (IRRRL)
The Interest Rate Reduction Refinance Loan (IRRRL) can be used to refinance an existing VA loan into a new VA loan with a lower interest rate. It’s also used by homeowners looking to switch from an adjustable rate mortgage (ARM) to a fixed-rate mortgage to get a more predictable monthly payment.
Here are some other benefits to consider:
- This loan is available without an appraisal or any credit underwriting.
- You’re not required to pay closing costs upfront.
- The funding fee is lower than you’ll find with VA new-purchase and construction loans.
In terms of costs, you’ll pay a 0.5 percent fee to take out an IRRRL along with the lender’s closing costs, which can be rolled into the new loan. Some lenders also offer to pay the closing costs for you in exchange for a higher interest rate.
However, you cannot tap into your home equity if you refinance your current VA loan with an IRRRL. In other words, you can’t get an extra amount of cash; you can only borrow up to the same amount as your existing mortgage.
VA cash-out refinance
A VA cash-out refinance loan allows current homeowners to refinance their mortgage and take out some or all of their accrued equity. This type of loan can be used to refinance an existing VA loan or a conventional mortgage, and the VA will guarantee loans worth up to 100 percent of the value of the home. Like other VA loans, this loan requires you to meet military service requirements and have a Certificate of Eligibility (COE) on hand.
It can be beneficial if:
- You want to switch from a conventional to a VA-backed loan.
- You want to make home improvements that will increase your property value.
- You want to pay off expensive debt and save a bundle in interest.
If you’re considering this option, have a clear goal in mind for the funds, and be realistic about your own habits. If you intend to use the cash to pay off credit cards, for example, you’ll need to be sure you won’t accumulate an unmanageable balance again in the future.
If it’s your first VA home loan, the funding fee is 2.3 percent. But if you’ve already used your VA loan benefit before, the funding fee increases to 3.6 percent. You’ll also be responsible for closing costs.
VA IRRRL vs VA cash-out refinance
|VA IRRRL||VA cash-out refinance|
|Primary Purpose||To secure a lower interest rate or switch from an ARM to a fixed-rate mortgage||To tap into your home equity and convert it into cash|
|Property Type||Any residence: primary, vacation home, etc.||Primary residence|
|Requirements||Credit underwriting and appraisals not required by all lenders
No 30-day late payments within the last 12 months (select lenders)
|Credit and income requirements must be met
Appraisal is also required by the lender
|Closing Costs||Can be rolled into the loan or paid by the lender||Must be paid upfront|
|Loan Restrictions||Limited to VA-backed home loans||Can be used for conventional and VA-backed loans|
Should I refinance into a VA loan?
It depends on your unique financial situation. VA loans do come with a host of perks that could make them the better choice. You’ll likely get a lower interest rate than you would with other refinancing options along with more affordable closing costs. Plus, you won’t pay mortgage insurance if you refinance into a VA loan. In fact, you might not need to make a down payment at all.
If you already have a VA loan you want to refinance, an IRRRL could even allow you to switch to a new loan without any underwriting requirements. If you’re looking to access your home equity, a VA cash-out refinance could also be the better option as you could be eligible to pull out up to 100 percent of the appraised value of your home.
But there are special expenses (those funding fees) and certain limits. Ultimately, you must consider the costs that come with these loan products to determine if refinancing into a VA-backed loan is a smart financial move.
If you currently have a VA loan or a conventional mortgage and want to refinance into a VA loan with better rates and terms, a VA loan calculator can help you figure out how much your new mortgage payment might be. Also compare rates and terms across multiple lenders since loan providers ultimately set the rates and terms of these loans, and not the federal government or the VA itself.