VA loan refinances involve quirks and perks
VA refinances outlined
- Open to eligible active-service personnel, veterans and eligible family members
- Typically require the borrower to occupy the home as a primary residence
- Streamlined program allows borrowers with an existing VA loan to quickly refinance with minimal documentation
- No down payment or mortgage insurance required, but usually has a funding fee
The VA program has some quirks not seen in other loan programs, however. Notably, the program is not open to everyone. Before applying for a VA loan, the borrower has to obtain a certificate of eligibility (COE) from the agency. Active-service members and veterans of the regular armed services, National Guard and reserves, as well as some family members, can qualify for a COE. The actual eligibility requirements vary by type of service, and the length and era of service.
VA loans differ in other ways as well. Generally, the borrower must occupy the home. VA loans usually don’t allow the borrower to finance rental properties or second homes that they don’t intend to soon occupy as their primary residence.
VA refinancing benefits
The VA loan also comes with the some special perks. Borrowers do not have to make a down payment to obtain a VA loan, but instead pay an initial funding fee. As with the eligibility, the amount of the fee depends on the type of service, and the number of times the borrower has used the benefit.
Most recently, the funding fee has been lower than the 3.5-percent down payment requirement for the Federal Housing Administration (FHA) program. Unlike FHA and conventional loans purchased by Fannie Mae and Freddie Mac, VA loans do not require borrowers to purchase mortgage insurance. This is one of the greatest advantages of refinancing through the VA program.
FHA now charges an annual insurance premium for the life of the loan. Conventional loans purchased by Fannie and Freddie require that the borrower hold private mortgage insurance until the equity in the home reaches 20 percent of the home’s value.
As with other loan programs, you can refinance into a VA loan from another loan program, or refinance an existing VA loan to gain a better rate, or to cash out equity from the home.
Also, like other government programs, the VA doesn’t fund the loan. The borrower obtains a VA loan through a private lender. The government guarantees the payments to end investors in the loan. This ensures that VA loans can be obtained at reasonable rates.
For borrowers with existing VA loans, the agency offers a streamlined product known as the interest-rate reduction refinance loan, or IRRRL. The approval process requires minimal documentation. This program is designed for people who want to lower their rates or change the loan terms from, say, a 30-year fixed mortgage to a 15-year term.
For standard-purchase loans and cash-out refinances, however, a borrower must be able to demonstrate reasonably good credit and a sufficient income. VA loans typically also require an inspection to ensure that the property is safe.