When you want to keep your home but replace your home loan, refinancing is an option worth considering. If you’re hoping to replace your current loan with a VA loan from the U.S. Department of Veterans Affairs’ home loan program, then you’ll want to explore the VA refinance guidelines. After all, the VA offers a couple of different options for refinancing. Reviewing the rules can help you decide which one is the best fit for your needs.
VA Refinance Guidelines
As the Federal Reserve Board explains, when a borrower refinances a mortgage, they pay off their existing home loan and replace it with a new one. There are many reasons why this financial move might make sense. It might be done to secure a lower interest rate or a lower monthly payment. Borrowers might refinance to end the requirement for mortgage insurance or to switch from a loan with an adjustable interest rate to one with a fixed rate. In some cases, refinancing is used to turn some or all of the equity a homeowner has amassed into cash. Keep in mind your financial situation and your reason for refinancing as you weigh the VA refinance guidelines to determine which type is best for you. You have two great options:
VA Cash-Out Refinance
As The Mortgage Reports notes, a VA cash-out refinance loan is the option to choose if you hope to turn equity into cash since it will allow you to access up to 100 percent of your equity. It’s also the only VA refinance option that allows you to transform a non-VA loan into a VA loan. If you’re interested in this form of financing, you’ll need to find a lender who offers these loans and come armed with proof of your eligibility. You’ll also need the same type of documentation required for a purchase loan, so having your income documents, tax returns, bank statements, and similar paperwork handy will help speed up the process. While the VA’s backing means that these loans come with favorable terms, you do have to demonstrate that you have the credit and income to qualify for the loan that you’re seeking, so your lender will review your application carefully. While you wait, you may want to prepare for closing costs. With this loan, they’ll need to be paid upfront at closing.
Could you be approved for a VA cash-out refinance loan? Like other VA-backed loans, these loans are a benefit that not everyone is entitled to use, and even borrowers who are eligible for VA loans must meet specific requirements. In fact, the VA insists that a borrower must meet all of the following requirements to qualify for a VA cash-out refinance loan:
- The borrower must qualify for a Certificate of Eligibility.
- The borrower must meet the standards set by the VA and the lender for credit and income in order to be approved for the loan.
- The borrower must plan to use the home that they’re refinancing as their primary residence.
VA Interest Rate Reduction Refinance Loan
With the VA’s Interest Rate Reduction Refinance Loan, or IRRRL, your options are much more limited. This refinancing product doesn’t allow for either cashing out home equity or starting with anything but a VA loan. However, as NerdWallet points out, sacrificing flexibility can gain you something else that’s quite valuable in its own way: convenience. In fact, the IRRRL is often dubbed the streamline refinance because its no-frills approach requires less paperwork. Approvals can generally be reached fairly quickly, and closing costs can be rolled into the loan.
Do you have what it takes to get approved for an IRRRL? It should come as no surprise that there are specific requirements that a borrower must fulfill if they hope to qualify for one of these loans. According to the VA, a borrower must meet all of the following standards if they hope to secure an IRRRL:
- The borrower must have an existing VA home loan.
- The borrower must plan to use the IRRRL to replace their existing VA home loan.
- The borrower must verify that the home covered by the loan either is their primary residence now or served as their home in the past.