VA Loan Refinancing Guide: How Military Mortgages Work

Refinancing your current mortgage into a VA loan can be a smart move if you’re an active-duty military member, a veteran or an eligible spouse. Fortunately, qualifying to refinance to a VA loan isn’t overly difficult, provided you meet the military service requirement and lender criteria. Here’s everything you need to know about VA loan refinancing.

What is VA loan refinancing?

A VA loan or mortgage refinance is a home loan product backed by the Department of Veterans Affairs (VA). It lets you swap your current loan for a new one, but with different terms. Depending on the type of loan you select, you may be able to get a lower interest rate, change the loan term or convert your home equity into cash.

In addition, if you originally took out an adjustable-rate mortgage (ARM) and want more predictable monthly payments, you can switch to a VA fixed-rate mortgage.

Types of VA loan refinancing

There are two main options available to you when you choose to refinance with a VA loan:

1. Interest Rate Reduction Refinance Loan (IRRRL): Often called a VA streamline refinance, an IRRRL is available to current VA loan-holding homeowners looking to secure a lower interest rate.
2. VA cash-out refinance: Lets any mortgage-holder swap out a current home loan with a new one and tap into the home equity they’ve built up.

Who qualifies for a VA mortgage refinance?

As the name implies, VA loan refinancing is available to current and former members of the U.S. military. More specifically, here’s what you’ll need to qualify for VA refinance loans:

• Service: Eligibility for a VA home loan typically requires 90 days of active-duty military service during a named conflict, six years in the National Guard or Reserves, or 181 consecutive days of active duty in peacetime. Veterans must have an honorable discharge, though exceptions exist. You may also qualify if your spouse died in the line of duty or due to a service-related disability. VA loans also require a Certificate of Eligibility (COE) verifying military service, obtained through your lender or directly through the Department of Veteran Affairs.
• Income: Borrowers also need to show sufficient income to repay their loans, with a debt-to-income (DTI) ratio typically capped at 41 percent.
• Credit score: While the VA doesn’t set a minimum credit score, most lenders look for at least 620 — except for the IRRRL, which often doesn’t require underwriting).
• Property type: Property purchased with a VA loan must be your primary residence, not a second home or rental property.
• Timing: You should occupy the new home within 60 days of closing, though extensions up to 12 months are possible under certain conditions. Moving in beyond 12 months is rarely considered acceptable by the VA.

How to refinance into a VA loan

It is relatively simple to refinance into a VA loan. However, the two types require slightly different steps to obtain.

Interest Rate Reduction Refinance Loan (IRRRL)

If you’d like to refinance to an IRRRL, follow these steps:

1. Find a lender. IRRRLs are backed by the VA but are offered by banks, credit unions and private mortgage companies. Bankrate’s list of the best VA lenders can be a starting point for researching potential lenders. You can also talk to military friends or family about their experiences and recommendations.
2. Provide required information. You’ll need to submit documentation to apply for an IRRRL, which includes providing your Certificate of Eligibility (COE). The lender you choose to work with will let you know of any other required information you might need to provide.
3. Complete the lender’s process for closing. Each VA lender will have steps you must follow to close on the loan. In terms of costs, you’ll pay a 0.5 percent fee to take out an IRRRL, along with the lender’s closing costs, which can be rolled into the new loan. Some lenders also offer to pay the closing costs for you in exchange for a higher interest rate.

It’s important to note that you can only use the VA streamline mortgage if your new interest rate is lower than your current rate. That means you may have to wait for interest rates to drop before you can pull the trigger on a VA IRRRL. There’s one exception: If you are switching from a VA ARM loan to a fixed-rate loan, then the new loan’s rate may be higher than the ARM rate.

VA cash-out refinance

A VA cash-out refinance loan allows current homeowners to refinance their mortgages and take out some or all of their accrued equity. You can use this type of loan to refinance either an existing VA loan or a conventional mortgage, and the VA will guarantee loans worth up to 100 percent of the home’s value. If you’d like to pursue a VA cash-out refinance, here’s how to do so:

1. Find a lender. Similar to the process for an IRRRL, the first step is to shop around and identify a lender you’d like to work with by comparing rates and terms.
2. Get your Certificate of Eligibility (COE). The lender will require your COE to move forward with this type of VA loan refinancing. This serves as proof that you qualify.
3. Submit required information. In addition to a COE, your lender will likely ask you to provide personal financial information such as paycheck stubs, and W-2 forms and tax returns from the last two years.
4. Obtain a home appraisal. The lender will order a home appraisal as part of the VA cash-out refinance process to determine your home’s value.
5. Follow the lender’s closing process. To complete your cash-out refinance, you’ll complete the lender’s steps for closing and pay closing costs and a required funding fee. If it’s your first VA home loan, the funding fee is 2.15 percent. But if you’ve already used your VA loan benefit before, the funding fee increases to 3.3 percent.

Benefits of refinancing to a VA loan

The benefits of refinancing with a VA loan are plentiful, which is why VA home loans are so popular among those who can qualify. Here are the other key advantages of refinancing with a VA loan:

• No mortgage insurance needed: VA home loans don’t require mortgage insurance, even if you don’t put money down.
• No cash upfront: No down payment is needed, though closing costs are still required for refinance loans.
• Minimal upfront costs: VA loans typically charge a funding fee that the borrower pays upfront. It can be wrapped into the closing costs, but this means paying more interest over time. The fee may be waived if you have a service-related disability or if you’re the spouse of a deceased veteran.
• Save on interest: VA home loan rates are typically competitive, potentially saving you money compared to conventional loans.
• Easier to get: Qualifying is easier due to the VA’s more flexible credit and income criteria, though cash-out refinance loans have stricter eligibility rules.
• No prepayment penalties: There are no penalties for paying off your VA loan early.
• More protectable payments: If you prefer a consistent monthly payment, you can switch from an adjustable-rate to a fixed-rate VA mortgage.

Should you refinance into a VA loan?

It depends on your unique financial situation. VA loans come with various perks that could make them the better choice.

Refinancing could make sense in the following scenarios:

• You’re seeking a lower interest rate than you would get elsewhere. VA loans, including refinances, are known for offering more competitive interest rates than typical market rates, which can save you money over the long term.
• You want to eliminate mortgage insurance fees. You won’t pay for private mortgage insurance if you refinance into a VA loan.
• You already have a VA loan you want to refinance. An IRRRL allows you to switch to a new loan, often without undergoing underwriting.
• If you’re looking to access your home equity. A VA cash-out refinance can allow you to tap up to 100 percent of the appraised value of your home.

If you’re thinking about refinancing your VA or conventional mortgage, a VA loan calculator can help you estimate your new monthly payment. While many banks, credit unions and online lenders offer VA loans, stick with specialists in VA lending, as the application can be complicated.

Ultimately, you must consider the costs that come with these loan products to determine if refinancing into a VA-backed loan is a smart financial move.