How to Refinance a VA Loan

Steps to Refinancing a VA Home Loan

Refinancing a Department of Veteran Affairs (VA) loan can provide many of the same benefits as a conventional refinance, but a VA refinance has some distinct advantages. Depending on the type of VA refinance you choose, you can replace either your current VA or non-VA loan if you’re an eligible veteran or active-duty service member.

There are two main options when it comes to a VA home loan refinance: a VA IRRRL/VA streamline refinance, and a VA cash out refinance. In this article, we’ll discuss the details of each of these options, the steps involved, and some considerations and frequently asked questions. Our goal is to provide you with the information you need to decide if a VA refinance is right for you.

VA Refinance Options

While both a VA IRRRL and cash out refinance require applying for a new mortgage, each has its own unique purpose, characteristics, and requirements.

VA IRRRL

A VA IRRRL (Interest Rate Reduction Refinance Loan), also known as a VA streamline refinance, is a simplified refinance option for homeowners with an existing VA loan. Its purpose is to lower interest rates or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Below are some key characteristics of this refinance option:

• Lower interest rates
• Lower monthly payments
• No appraisal required (in most cases)
• No income verification
• Less documentation
• Quicker timeline
• Minimum credit scores may not be required and if they are, it may be as low as 550.

You can estimate how much you could save using our VA loan refinance calculator. One thing to note about a VA IRRRL is that you can’t get cash out when you refinance, unlike a VA cash out refinance.

VA Cash Out Refinance

A cash out refinance allows homeowners to refinance their existing mortgage, whether it’s VA or non-VA, and get a new mortgage, allowing them to take out cash from their home equity. Below are some key characteristics of this refinance option:

• Access to your home equity as cash
• Cash that can be used for debt consolidation, home improvements, and more
• Home appraisal requirement
• Requirement of a higher minimum credit score (typically 570+) and a full credit check

Now that we’ve discussed the two main types of VA refinances, let’s look at the steps involved in refinancing a VA home loan.

Steps to Refinance a VA Home Loan

In this section, we’ll highlight the main steps that are part of refinancing a VA loan. These steps are not specific to Freedom Mortgage and are designed to provide an introductory overview of what the process can look like for anyone.

1. Review Your Current VA Loan

You’ll want to evaluate your current VA home loan, particularly your loan type, interest rate, and repayment term. A VA refinance won’t be the right call for everyone, but there are several circumstances where it can be beneficial, such as wanting a lower monthly payment or access to cash.

2. Confirm Your Refi Eligibility

To be eligible for a VA refinance, you generally need to meet the following criteria.

• General VA refinance eligibility requirements:
  • You must meet minimum service requirements. You may be eligible if you meet at least one of the following:
    • 90 consecutive days of active service during wartime
    • 181 days of active service during peacetime
    • 6 years of honorable service in the National Guard or Reserves
    • You’re a surviving spouse of a veteran who died in service or due to a service-connected disability
  • You must have a Certificate of Eligibility (COE). This is an official document issued by the VA that proves you meet the service requirements to qualify for a VA home loan. You can apply for a COE online or by mail.
• VA IRRRL/streamline refinance:
  • You must have an existing VA loan on the property.
  • You need to certify that you have previously occupied the home you want to refinance.
  • The new interest rate must be lower than the existing rate unless you’re switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan. This is known as net tangible benefit.
  • You need to have made at least six on-time payments and 210 days must have passed since the first payment was due on your current loan.
• VA cash out refinance:
  • You must occupy the property as your primary residence.
  • Lenders generally look for a credit score of 570 or higher and a debt-to-income ratio (DTI) typically between 41% - 50%. Try our DTI calculator to estimate your debt-to-income ratio.
  • Your income and employment will have to be verified.

3. Choose your VA Refinance Option

Next, determine which VA refinance option best aligns with your financial situation and goals. Deciding factors may include whether you want to shorten or lengthen your loan term, what your income level and credit score are, and so on.

4. Compare Lenders and Rates

It’s important to shop around and compare rates when looking to refinance, as rates can vary based on the lender, and not all lenders offer VA refinancing.

5. Submit Your Refi Application

The application process for a new loan might feel overwhelming at first, but once you’ve decided on which lender(s) to apply with, you just need to worry about gathering required documents. These will vary based on which type of VA refinance you’re pursuing and specific lender requirements, but this is a general list of documentation typically needed to apply.

• Personal identification (such as a driver’s license, passport, or social security card)
• Income documentation (pay stubs, W-2’s, or tax returns)
• Bank statements and credit reports
• Certificate of Eligibility (COE)
• Current mortgage statement
• Additional documentation if applicable, such as a VA disability awards letter

Remember that a VA IRRRL usually requires fewer documents for an application, but at the very least you’ll need valid identification and your COE.

6. Close on Your New VA Home Loan

Once your new loan is underwritten and approved, you’ll receive a call from our scheduling department to arrange your closing. You’ll also receive a copy of the Closing Disclosure at least three business days before your scheduled closing date to see a detailed breakdown of your new loan, including things like the loan terms and closing costs.

On closing day, you’ll need to bring valid identification, payment for closing costs if necessary, and a voided check if you’re getting cash out. Check out our article on practical tips for closing on a mortgage for more detailed information. At this point, you’ll start making payments on your new loan.

VA Refinance Considerations

There are several things to consider before deciding if a VA refinance is right for you. Here is a list of some pros and cons:

Pros

• Flexibility with loan terms (you can shorten or extend the loan term based on your needs)
• Lowering your interest rate and monthly payments
• Switching from an ARM to a fixed-rate mortgage
• Eliminating monthly private mortgage insurance (PMI) if you’re refinancing from a non-VA loan
• Receiving cash out from a VA cash out refinance
• Saving time and money with a VA IRRRL (no appraisal, minimal documentation, faster closing times, etc.)

Cons

• Paying a VA funding fee (some veterans may be exempt)
• Paying closing costs, which usually range from 2% to 6% of the loan amount
• Resetting the loan term (you may end up paying more interest overall on your new loan)
• Higher monthly payments if you shorten your loan term
• Cannot take cash out with a VA IRRRL
• Increased loan balance with a cash out refinance

The potential pros and cons will of course vary based on which refinance option you choose. We’ll outline a couple scenarios highlighting how each of the main VA refinances can be helpful for you.

Let’s say you’re having trouble making your monthly mortgage payments. A VA IRRRL might be a good option to lower your monthly payments since it doesn’t have many requirements, is a relatively quick process, and is ultimately designed to help homeowners get a loan that fits their current situation.

Another scenario could be that you want to renovate your home but don’t have enough funds to do so. A VA cash out refinance can help you access cash from your home equity by swapping your old VA loan out for a new one.

Refinancing a VA Loan FAQs

Below are some common questions related to refinancing a VA loan.

What Is a "Net Tangible Benefit?"

The VA wants to make sure that refinancing makes financial sense for you after you pay the fees and closing costs. They call this getting a "net tangible benefit." Significantly reducing your interest rate is one way to meet this standard. You will need a net tangible benefit to qualify for IRRRL refinancing.

How Soon Can You Refinance a VA Loan?

You must wait until the date that is the later of (1) the date in which you have made six consecutive monthly payments on the loan being refinanced or (2) the date that is 210 days after the first payment due date on the loan that is being refinanced. This is sometimes called "seasoning."

How Much Does It Cost to Refinance a VA Home Loan?

Because you take out a new loan when you refinance, you’ll likely have to pay some closing costs. These costs vary depending on the lender, but generally the closing costs for streamline refinances can average between 1% and 3% of the loan amount, according to the Mortgage Reports.

Most VA homeowners will also need to pay a VA funding fee when they refinance, which is currently set at 0.5% of the loan amount for IRRRL refinances. The VA funding fee for a cash out refinance is typically higher and depends on 1) your down payment amount and 2) whether it’s your first time or subsequent time using a VA-backed home loan. Some borrowers may be able to finance the funding fee into the loan amount. Please refer to the VA’s official website for exact rates.

How Long Does It Take to Refinance a VA Loan?

An IRRRL refinance can is typically completed in 30-45 days, but Freedom Mortgage has closed VA IRRRL loans in less than 30 days. Since the application process for this type of loan does not usually require an appraisal or income verification, the process is faster than a VA cash out refinance since it requires a full appraisal and credit check. These loans typically take 45-60 days to close.

How Many Times Can You Refinance with VA Loans?

There is no limit on the number of times you can refinance your home with a VA loan as long as you qualify. You will need to meet the same standards each time you refinance, including having your current loan for at least six months and receiving a net tangible benefit from the refinance. Each time you refinance, you'll replace your current VA loan with a new VA loan.

Can You Get Cash from Your Home Equity When You Refinance?

You can’t get cash from your home equity when you use the streamline program to refinance your VA loan. You will need to apply for a cash out refinance, instead.

Final Thoughts: Is a VA Loan Refinance Right for You?

In short, a VA IRRRL is best for homeowners who want to lower their interest rates or monthly payments, while a VA cash out refinance is best for homeowners who want to leverage their home equity to access cash. While refinancing can offer many benefits, it’s important to understand that it may result in higher total finance charges over the life of the loan.

If you think you’d benefit from a VA refinance, get started with us today and explore your next steps!