You have two options for refinancing a VA loan: reduce the interest rate or extract equity with a cash-out refi.
The benefits of a mortgage that’s backed by the Department of Veterans Affairs continue beyond the day your loan closes. You can lower your rate, tap into your home’s equity or even bring your conventional loan into the VA program by refinancing.
Two types of VA refinance
You can refinance your VA loan two ways:
- With an interest rate reduction refinance (IRRRL), also sometimes called a VA streamline.
- With a VA cash-out refinance
Interest rate reduction refinance loan
The Interest Rate Reduction Refinance Loan “is envisioned as a low-impact, no-frills refinance that exists to get veterans into a lower interest rate,” says Chris Birk, director of education with Veterans United Home Loans in Columbia, Missouri.
An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower Principal and Interest payments when compared to the existing VA loan… unless you’re refinancing out of a VA loan with an adjustable-rate. (For details, see NerdWallet’s explanation of the VA Interest Rate Reduction Refinance Loan, or IRRL.)
Unlike most other refinances, your home doesn’t have to be your primary residence. All that’s required is prior occupancy. If you’re stationed in a new area and want to keep your first home, for instance, you can refinance that mortgage without living in the home.
Some VA lenders might have their own company “overlays” and require items such as a minimum credit score, minimum income or an appraisal for a streamline refinance, Birk says. They might also require that you not have had any late mortgage payments within the past 12 months.
If you want to tap into your home’s equity, you can refinance your current mortgage — whether it’s VA or conventional — into a VA cash-out refinance loan.
Lenders always require a minimum credit score and an appraisal with this type of refinancing, and the home has to be your primary residence.
You may be able to finance up to 100% of the appraised value of your home, though the exact amount you can borrow will vary depending on your qualification and the lender you are working with.
The only way to bring a conventional loan into the VA program is with this type of Full Qualifying option.
To qualify for a VA refinance, you must be an active-duty service member, an honorably discharged veteran or the occupying spouse of a current service member on assignment . If you’re the widow or widower of a veteran and want to refinance a VA loan, you must be unmarried at the time of the refinance, and your spouse has to have died in the line of duty or from a service-related injury unless you’re applying for an IRRRL. In that case, the cause of death doesn’t matter, but you need to have obtained the VA loan prior to your spouse’s death.
Looking to refinance a VA loan?
Credit score and income requirements vary by lender, according to Jimmy Vercellino, a mortgage originator and VA loan specialist with First Choice Loan Services in Scottsdale, Arizona.
Vercellino says minimum credit score requirements can range from 580 to 640. Birk says that a common minimum credit score is 620.
In terms of your debt-to-income ratio, Vercellino says that 41% and lower is the norm, but lenders may accept higher DTI ratios, depending on the Residual Income calculation, as well as your credit score, payment history, and savings.
Because it’s the lender that’s putting money on the line rather than the VA, Vercellino says, the lender is able to put its own requirements on VA loans (the VA’s guaranty might cover only a quarter of each loan). And if one lender says no, it doesn’t mean that you can’t qualify for a VA loan somewhere else.
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