VA loan refinance: What is it and how does it work?

Refinancing your current mortgage into a VA loan can be a smart move if you’re an active-duty military member, a veteran or an eligible spouse. Fortunately, qualifying 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 loan refinancing?

A VA loan or 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.

In addition, if you originally took out an adjustable-rate mortgage (ARM) and want more predictable monthly payments, you can switch to a VA fixed-rate mortgage.

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 you are 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.  VA home loans require a Certificate of Eligibility (COE) that proves your military service. You request this form via your lender, who can use a special online system to get one, or you can request one online or in the mail through the U.S. Department of Veteran Affairs.
• 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 (the exception is: 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. If a lender allows a 600 credit score or lower, be prepared to pay a much higher interest rate on your loan.
• Property type: When you apply for a VA mortgage, it must be used to purchase a primary residence. You cannot purchase second homes or rental properties using a VA mortgage.
• Time limits: When you use a VA loan, you must occupy the new abode within what the VA calls “reasonable time,” which is usually 60 days after closing on the home. However, if you meet certain conditions, you may claim occupancy later than 60 days but not more than 12 months.  Occupancy after 12 months of closing on a property is rarely considered “reasonable” by the U.S. Department of Veteran Affairs.

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. 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.
• No cash upfront: VA loans, including refinance mortgages, don’t require a down payment. However, you must still be prepared to pay your refinance closing costs.
• 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. But do run the numbers to calculate potential savings — some homeowners 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: With a VA loan, you can pay off your home early if you want to without worrying about added fees or “gotchas.”
• In addition, if you originally took out an adjustable-rate mortgage and want a more predictable monthly payment, you can switch to a VA fixed-rate mortgage to help you with your budget.

How to refinance into a VA loan

There are two main options available to you when you choose to refinance with a VA loan:

1. Interest Rate Reduction Refinance Loan (IRRRL): Often called a VA streamline refinance, an IRRRL loan is available to current VA loan-holding homeowners looking to secure a lower interest rate.
2. 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)/VA streamline refinance, 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 their VA adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

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 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 can only use the VA streamline mortgage if your new interest rate is lower than your current rate. That means you may have to wait for interest rates to drop before you can pull the trigger on a VA IRRRL. There’s one exception: If you are switching from a VA ARM loan to a fixed-rate loan; then the new loan’s rate may be higher than the ARM rate. 

Also, you can only borrow up to the same amount as your existing mortgage. This means you can’t get an extra amount of money, as people often do with refis. For that you’ll need a VA cash-out refinance.

VA cash-out refinance

A VA cash-out refinance loan allows current homeowners to refinance their mortgages and take out some or all of their accrued equity. This type of loan can be used to refinance either an existing VA loan or a conventional mortgage, and the VA will guarantee loans worth up to 100 percent of the home’s value. 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 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 (as of April 2023)  is 2.15 percent. But if you’ve already used your VA loan benefit before, the funding fee increases to 3.3 percent. You’ll also be responsible for closing costs.

Should I refinance into a VA loan?

It depends on your unique financial situation. VA loans come with various perks that could make them the better choice. You’ll likely get a lower interest rate than you would with other refinancing options and 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.

Next steps to get a VA loan

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. You should always work with a VA-approved lender when taking out any kind of VA loan or refinance. And while many banks, credit unions and online lenders offer VA loans, you should consider working with lenders who specialize in them.

If you are unclear about where to start, check out our VA-approved lender list and ask your military colleagues or family members about their VA loan experiences with their lenders. Like any mortgage product, comparison shop for your loan because it is ultimately the loan providers that set the rates and terms of these loans, not the federal government or the VA itself.