Since 1944, the U.S. Department of Veterans Affairs (VA) has helped more than 18 million American veterans become home owners. The loan, issued by a lender, is insured against default by the VA. They also dictate the requirements for those who can qualify and the terms of the mortgage. A VA loan offers benefits to active-duty military members, veterans, and surviving spouses. VA loans are generally used for a few purposes, such as buying or building a new home, refinancing a mortgage loan, or home improvements.
Benefits of a VA Loan
VA loans feature a number of benefits compared to conventional loans. If you are an eligible veteran or active duty personnel, then you should seriously take into consideration the VA loan as the most important option for mortgage financing. Benefits that make a VA loan better than the alternative are:
- No down payment. Apart for a couple of options that have strict requirements, it is impossible to find a lending option that will finance 100 percent of the loan. There is also no prepayment penalty on VA loans, unlike conventional loans.
- Lesser requirements. Your credit score will not matter as much as it would if you were to apply for a conventional loan. In fact, it is estimated that close to 80 percent of the people who choose a VA loan would not qualify for a conventional loan.
- No mortgage insurance. Compared to conventional and FHA loans that require you to pay a small percent of the total loan amount as mortgage insurance, VA loans do not have this requirement.
- Easier to refinance. You can easily qualify for a lower interest rate when refinancing within the VA program through their streamline refinancing option.
Types of VA Refinancing
Also known as the streamline refinance, the Interest Rate Reduction Refinance Loan (IRRRL) is the best choice if you already have a VA loan and want to refinance in order to reduce your monthly mortgage payments. Because you are refinancing from one VA program to another, this type of refinance will be completed quickly. Unless the lender specifically requests it, you won’t have to have your home reappraised. Also, closing costs can be rolled into the balance of the loan, meaning that you will have to pay little or nothing out of pocket.
Your other option when refinancing a VA loan is the cash-out refinance loan. This program will give you the opportunity to refinance your VA loan while taking cash out of your home’s equity for home repairs and improvements, or in order to pay off debts. Normally, you can refinance up to 90 percent of your home’s value with VA’s cash-out loan. You qualify for this type of refinancing based on your income and credit score. Same as with the IRRRL, the closing costs can be rolled into the entire loan amount.
Steps of VA Loan Refinancing
Refinancing a VA loan is a good choice if you wish to reduce the cost of your mortgage. However, you should be aware that refinancing can get pretty expensive. Refinancing fees, such as the origination fee and the VA funding fee, appraisals and closing costs, can make this whole process cost a few good thousands of dollars. If you have decided that refinancing is the right path for you, here are the steps that you should follow:
- Contact a few mortgage refinance lenders until you find the best rates. The interest rate on your new loan will have to be lower than the one on the original loan, as this is a requirement of the VA Interest Rate Reduction Refinancing Loan program.
- Your lender will ask you to provide documents that will prove your monthly income and expenses. Documents that you will have to show are your last two paychecks, your last two income tax returns, bank statements, and statements from other loans and credit cards.
- Even if the VA doesn’t require this, it is up to each lender’s requirements, so you might be asked for permission to have your credit report checked.
- The VA doesn’t require an appraisal for refinancing, but some lenders may require one, so they will hire a real estate appraiser to determine the value of your home. Unfortunately, you will have to pay for this appraisal.
- After you receive the new loan terms and interest rate, you will need to sign a contract and start making the new monthly payments.
Refinancing a loan that is backed by the U.S. Department of Veterans Affairs is not a difficult process and the requirements are very lenient. While refinancing is typically a good choice and will improve your financial situation, you need to do your homework and look beyond interest rates when deciding if it’s the right choice for you.