How to refinance into a VA loan

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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 who can qualify. Fortunately, meeting the criteria to refinance your mortgage with the VA isn’t overly difficult provided you meet their military service requirement.

For the most part, 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. You may also be eligible for a VA loan if you are married to a servicemember who died in the line of duty or as a result of a service-related disability.

In terms of additional VA requirements, you should note that 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.

From there, individual mortgage lenders set criteria that determines whether you qualify for a VA loan. Generally speaking, you’ll need a credit score of at least 620 to be approved for a VA loan or a VA loan refinance with the exception of an Interest Rate Reduction Refinance Loan, or IRRRL, which doesn’t require underwriting. Borrowers also need to show sufficient income to repay their loans, although the guidelines for approval are generally easier to meet when compared with conventional mortgage loans.

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. For starters, VA loans don’t require a down payment, whereas another government-backed loan, the FHA home loan, requires at least 3.5 percent down.

VA home loans are also offered without private mortgage insurance, or PMI, which typically tacks on another .05 to 1 percent on your mortgage amount annually until you have at least 20 percent equity. Instead, VA loans typically come with a funding fee that is paid once upfront and can be wrapped into the closing costs when you refinance with a VA loan. However, you can avoid paying the funding fee altogether if you suffer from 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.

VA home loan rates are also incredibly competitive, and the interest rate can be lower than what you might qualify for with a conventional loan. And that’s in addition to relaxed credit and income requirements that make qualifying easier, as well as a limit on closing costs that can help you keep the upfront expenses involved in buying or refinancing with a VA home loan at a minimum.

Another benefit: VA loans also come with no prepayment penalties as well, so you can pay off your home early if you want without having to worry about added fees or “gotchas.”

How to refinance into a VA loan

There are two main options available to you when you choose to refinance with a VA loan, and you’ll want to conduct some basic research to determine which is right for you. After all, VA loan refinance options can help you achieve different goals, including lowering your monthly payment, getting cash out or simply switching from a conventional loan to a VA loan.

Interest Rate Reduction Refinance Loan (IRRRL)

The Interest Rate Reduction Refinance Loan, or IRRRL, can be used to refinance an existing VA loan into a new VA loan with a lower interest rate. This loan is available without an appraisal or any credit underwriting, and you can include all of your closing costs in your new loan product. Also note that the funding fee for this type of VA refinance loan may be lower than the fee for applying for a VA loan to purchase a property.

This loan can be a smart option if you can qualify for a lower interest rate because rates went down, and if you prefer to have a lower monthly payment. However, you should note that you cannot get cash out from your equity if you refinance your current VA loan with an IRRRL.

VA cash-out refinancing

A VA cash-out refinance loan intends to let current homeowners refinance their mortgage and take out some or all of their accrued equity. With this type of refinance, veterans could get their hands on cash they could use to pay off debt, make home improvements and more.

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.

The bottom line

If you currently have a VA loan or a conventional mortgage and want to refinance into a VA loan with better rates and terms, use a VA loan calculator to 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.

A VA loan can help you save money with a lower interest rate, limited closing costs and no upfront requirement for a down payment. If you already have a VA loan you want to refinance, an IRRRL could even let you switch to a new VA loan without any underwriting requirements. With interest rates on home loans nearing record lows, the time to explore all your options and consider switching to a VA loan is now.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."