October 16th, 2019 8:02 AM by Jackie A. Graves
It’s not only easier to buy a home with a VA loan, it’s easier
a home with one, too.
Because so few veterans default on their mortgages and the
Department of Veterans Affairs guarantees 25% of the home’s purchase price to
the lender if it has to foreclose, these loans are less risky for lenders.
That means you can have more debt, a lower credit score and less
equity in your home than you’d need to qualify for a traditional loan. Indeed,
you don’t need any equity in
your home to refinance with a VA mortgage.
Yet VA loans don’t require borrowers to buy mortgage
insurance and have lower interest rates than conventional
The average cost for a 30-year fixed-rate VA loan (for
purchasing and refinancing) is 4.41%, according to Ellie Mae Inc., a
California-based mortgage technology firm whose software is used by many
That’s around a quarter of a point less than the average cost of
a conventional mortgage and represents a particularly good deal for borrowers
with dinged credit who normally would have to pay more than average rates
without government help.
Ellie Mae Inc., April 2019 Origination Insight Report.
VA loan refi
Average FICO credit score
Average debt-to-income ratio
Average home equity
Your path to a new VA loan depends on whether you just want to
lower your monthly payment, want cash back from your refinancing or have been
delinquent on your VA loan.
Here are your three options:
If all you want to do is take advantage of lower interest rates,
the streamline loan (or interest rate reduction refinance loan) is for you.
It’s available to veterans who want to refinance an existing VA
home loan with a history of on-time payments. One mortgage payment that was
less than 30 days late in the last 12 months is OK, as long as you’re current
A streamline loan can be easy because the VA does not require
you to obtain a new certificate of eligibility, document your income, have your
house inspected or appraised, or even undergo a credit check.
Although lenders are not prohibited from requiring a full
appraisal, they’re much more likely to depend on a computer-generated value
that doesn’t require an appraiser to examine the inside of your house.
While the VA does not have a minimum credit score requirement,
lenders typically want to see a score of at least 620.
Changes in the way lenders evaluate applications also mean
borrowers who have been turned away before may now qualify for a VA refinancing
or be approved to borrow more than before.
If, for example, you pay off your credit card balances in full
and on time each month, or if you’ve been carrying a credit card balance that
you will pay in full at or before closing, it won’t count against your
debt-to-income ratio like it did in the past.
In parts of the country that still have depressed real estate
values, a streamline loan may be your only option for refinancing because
lenders don’t have to require an appraisal.
You will pay closing costs, points and funding fees as with any
refinance, but these costs can be rolled into the new loan. Or you can take a
slightly higher interest rate in exchange for the lender paying the loan costs.
Other than the amount of your closing costs, you aren’t allowed
to borrow more than you need to refinance the balance on your current loan.
The purpose of the program is to reduce your monthly payments,
so you’re not allowed to get cash back or consolidate
other loans, no matter how much equity you have.
There’s an exception to this rule: You may receive up to $6,000
in cash to pay for renovations that make your home more energy efficient and
were made within 90 days of the closing on your new loan.
A higher monthly payment is also allowed if you refinance:
If your new monthly payment will be at least 20% higher than
your old one, the VA requires lenders to underwrite your loan, meaning you’ll
have to provide pay stubs, pass a credit check and do all the other things a
streamline loan doesn’t normally require.
If you have equity in your home and you need cash to pay off
other debts, improve your home, buy a car, pay tuition or use for any other
lender-approved purpose, choosing a cash-out refinance is your best bet.
To qualify, you must live in the home and not be underwater. You
can refinance up to 100% of your home’s appraised value, plus a little extra if
you need it to make energy-efficiency improvements or pay the VA funding fee.
You can even use this loan to refinance from a non-VA home loan
into a VA home loan.
You’ll also need to obtain
a certificate of eligibility, just as you did when taking out your
first VA mortgage. It’s easiest to have a lender obtain it for you.
The cash-out refinance process will take a little more work than
the streamline option. You must requalify and have your home appraised. Home
values continue to increase, so you might qualify now even if you couldn’t before.
Like any refinance, you’ll pay closing costs. You can use some of your cash
proceeds to pay these charges.
Borrowers can pay the VA funding fee out of pocket, but most add
it to the loan. The fee is waived for veterans who have a service-connected disability.
It’s a catch-22 for many people. You’re having trouble keeping
up with mortgage payments and other bills. A lower interest rate would help,
but you can’t refinance a delinquent mortgage.
If you have a VA mortgage, however, you’re in luck.
Being delinquent does not make you ineligible to refinance. You
will have to submit your application for what the VA calls “prior approval” and
go through credit approval and underwriting to refinance a loan 30 days or more
past due. But it can be done with either of the above options.
The VA’s guidelines even let borrowers refinance late payments
and late charges from the old loan, as long as doing so won’t result in an
unaffordable monthly payment.
After you apply, your loan officer will analyze your case and
determine whether your reasons for falling behind on your payments have been
resolved. For example, you might have been unemployed or ill but are back at
They also must determine that you’re willing and able to make
the proposed new loan payments after you refinance.
You can’t simply have been careless with bill-paying and still
expect to get a loan.
Finally, whether you’ve been delinquent or not, the VA wants to
make sure borrowers benefit from any refinancing.
The government requires lenders to show you the interest rate
and monthly payments for the new loan versus the old loan, as well as how long
it will take for you to recoup your closing costs from refinancing with the
lower monthly payment on your new loan.
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