What are the best options to refinance a VA loan?
There are multiple options to refinance a VA mortgage including the VA Streamline Refinance Program, a standard VA refinance, a conventional mortgage or an FHA loan. The program that is right for you depends on many factors including your current mortgage terms, your personal financial profile and your refinancing goals such as if you want to take cash out. We review each refinance option in detail below so you can select the loan program that best meets your needs.
VA Streamline Refinance Program. Also known as an interest rate reduction refinance loan (IRRRL), the VA Streamline Refinance Program enables you to refinance an existing VA mortgage with reduced qualification requirements. Using a VA Streamline Refinance typically enables you to save money and time as compared to other refinance programs.
Use ourMORTGAGE REFINANCE CALCULATORto determine how much you can save by refinancing
For example, in many cases you are not required to confirm your employment, income or credit score. Additionally, the program typically does not require an appraisal report which means there is no maximum loan-to-value (LTV) ratio. So if you do not have a lot of equity in your property then a VA Streamline Program may be your best option to refinance.
Review our VA Streamline Refinance Guide
To qualify for a VA Streamline Refinance you must be current on your loan with no more than one late payment over the past year. Additionally, unless you are changing from an adjustable rate mortgage (ARM) to a fixed rate mortgage or reducing the length of your loan, your new mortgage rate and monthly payment must be less than your current rate and payment. The good news is that VA mortgage rates tend to be lower than the rates for other loan programs so it may be easier to meet this requirement and save money when you refinance.
VA Streamline Refinances are offered by approved lenders including banks, mortgage brokers and credit unions. The table below shows leading VA lenders in your area. We recommend that you shop multiple lenders to find the best refinance terms.
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The downsides to the VA Streamline Refinance Program are that you are required to pay a one-time VA funding fee (0.5% of the mortgage amount), although this fee is lower than for a standard VA mortgage and can be added to your loan amount. You also cannot receive any proceeds from the loan so if you want to take cash out when you refinance, you should consider a different option.
Standard VA Refinance. This refinance option requires that you meet standard VA Mortgage Program qualification guidelines for your credit history, debt-to-income ratio, employment status and LTV ratio. A standard VA refinance requires more documentation than a Streamline VA Refinance including a credit report, employment verification and an appraisal report to determine the fair market value of your property.
Review our VA Mortgage Guide
Although a standard VA refinance requires additional time, paperwork and cost, you still benefit from lower VA mortgage rates. Additionally, unlike a VA Streamline Refinance, with a standard VA refinance you can receive proceeds from the loan. So if you want to access the equity in your property, a VA cash out refinance may be your best option.
Please note that with a VA cash out refinance, you are required to pay a higher one-time VA funding fee as compared to the streamline refinance program. We outline the funding fee requirement below:
Regular Military: 2.15% of the mortgage amount for the first use and 3.30% for subsequent uses
Conventional Mortgage. You can also refinance a VA loan with a conventional mortgage. The benefits of using a conventional mortgage include no VA funding fee. Plus, refinancing with a conventional loan enables you to preserve your VA entitlement if you want to use a VA loan on another property.
For example, if you bought a home with a VA loan and decide to move out and use it as a rental property, you could refinance the original mortgage with a conventional loan and use a new VA mortgage to buy a new home.
Additionally, while conventional mortgage rates tend to be higher than VA rates, the qualification requirements may be more flexible including permitting a higher debt-to-income ratio. This may enable you to qualify for a higher mortgage amount depending on how much equity you have in your home and other factors.
The table below outlines conventional mortgage refinance rates and fees. We recommend that you compare VA and conventional refinance proposals from multiple lenders.
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FHA Mortgage Program. If you cannot qualify for a VA or conventional mortgage refinance program then you should consider an FHA mortgage. Although it is not common to refinance a VA loan with an FHA loan, there are multiple benefits to the program.
The FHA Mortgage Program applies more lenient eligibility guidelines than a VA or conventional loan. For example, you can qualify for an FHA refinance with a credit score as low as 500 if you have at least 10% equity in your property and a score of 580 if you have between 3.5% and 10% homeowners equity.
The FHA Program also permits a higher debt-to-income ratio for applicants with supporting factors such as significant financial reserves, high homeowners equity or additional income sources that are not reflected on their loan application. You can also take cash out of your home with an FHA cash out refinance, although the maximum LTV ratio is 80%.
Review our FHA Cash Out Refinance Guide
FHA mortgage rates also tend to be lower than conventional mortgage rates and comparable to VA rates because both programs are backed by the government. The lower your mortgage rate, the more money you save by refinancing.
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The downside to an FHA mortgage is that you are required to pay both an upfront and monthly FHA mortgage insurance premium (MIP), whereas you are not required to pay ongoing mortgage insurance with a VA loan. Despite these extra costs, an FHA mortgage may be a good refinance option for certain borrowers, particularly if you cannot qualify for a VA or conventional loan.
In closing, if you plan to stay in the property, it usually makes the most sense to refinance a VA loan with another VA mortgage, especially if you are eligible for a VA Streamline Refinance. If you want to keep your VA entitlement or you are not eligible for the VA Program, then a conventional or FHA loan may be a better option.
It is important to compare program terms, including your interest rate, closing costs, monthly payment and mortgage insurance fees, to select the refinance option that best meets your needs.
Sources
"Interest rate reduction refinance loan." VA. U.S. Department of Veterans Affairs, 2020. Web.
"II.A.8.d.v. Cash-Out Refinances." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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