A VA refinance is brand new loan, not just an adjustment of a current one. A VA refinance will require a brand new loan application, a new title report and depending upon the type of VA refinance, more paperwork. Today, there are three different VA refinance loans.
The IRRRL, or Streamline Refinance
IRRRL stands for Interest Rate Reduction Refinance Loan, often called a VA streamline. The VA streamline is a refinance loan that requires less paperwork than any other VA loan available today. The VA streamline allows a qualified borrower to refinance to a lower interest rate at less cost and with less paperwork compared to what was originally required for the previous loan.
For example, the VA streamline requires no documentation of income. This means the loan application doesn't need copies of your paycheck stubs, old W2 forms or tax returns. In fact, no verification of employment is needed whatsoever.
A credit report is not required by the VA and the VA lender needs only to make sure there were no more than one payment more than 30 days past due over the previous 12 months. Even though lenders may override this feature and require a minimum credit score, VA guidelines only mention examining the VA mortgage history for the previous year. One more advantage for a streamline? The VA streamline loan doesn't need an appraisal, only the completed loan application and minimum documentation is needed.
There are some specific requirements to be eligible for a VA loan besides not having more than one late payment over the past 12 months. The refinance must result in a lower payment for the veteran or refinance out of an adjustable rate mortgage into a fixed rate loan. The transaction must also be a VA to VA refinance, a VA streamline won't refinance an existing conventional or FHA loan and during a streamline, there can be no cash-out to the borrower.
A VA cash-out refinance is a loan that replaces an existing loan with a VA loan and pulls equity out of the subject property in the form of cash. Unlike the IRRRL, a cash-out loan is fully documented and the borrowers must supply their most recent paycheck stubs, W2 forms and two years federal tax returns to the VA lender.
The amount of cash available to the borrower is determined by evaluating the current appraised value of the property. Most VA lenders will allow a cash-out loan amount up to 90 percent of the appraised value (up to 80 percent in Texas).
For example, a borrower has a loan amount of $100,000 and wants to refinance to a lower rate. The appraised value is reported at $150,000, allowing for a maximum cash-out loan of 90 percent of $150,000, or $135,000. The amount of cash available to the borrower is the difference between $135,000 and $100,000, less closing costs associated with the VA loan.
Conventional to VA Refinance
While a VA streamline refinance only allows a VA to VA transaction, VA loans can refinance other existing loan types including FHA and conventional mortgages. While not common, refinancing from a conventional to a VA loan is advantageous when current property values are a concern.
Conventional loans allow for a refinance up to 90 percent of the current value of the property. If an existing mortgage balance is $200,000 then the appraisal must be at least $222,222 before a conventional refinance can take place. If the home value comes in closer to $200,000, then the borrower can't refinance their conventional loan with another conventional loan. But refinancing into a VA loan is an option.
A standard VA refinance (no cash-out) allows the loan amount to be up to 100 percent of the value of the home. In the above example, let's say the property appraised at $205,000 the loan can be refinanced from a conventional mortgage to a VA loan.
If the interest rate is low enough for the VA loan compared to an existing conventional or FHA loan, then it can make sense to refinance into a new VA mortgage.
To determine if any of these three options works for you, contact any VA lender and run your scenario by one of their loan officers. Determining whether or not a refinance is worthwhile is simply a matter of running a few numbers.
Grant Moon is the author of a soon-to-be-released guide on VA loans.