Introduction to VA Refinance Loans: IRRRL & Cash-Out Refinance Loans
There are two powerful VA refinance options on the market: the VA Interest Rate Reduction Refinance (IRRRL) and the VA Cash-Out refinance. VA refinance loans are a cost-effective way to cash out your home equity, lower your interest rate or switch from an adjustable-rate mortgage to a fixed-rate VA loan.
VA refinances have flexible requirements, making these mortgages easy to apply for. Here’s what you need to know about VA refinance loans.
The VA offers two refinancing options for Veteran homeowners: the VA Streamline refinance, and the VA Cash-Out refinance.
A VA Streamline refinance mortgage, also known as an Interest Rate Reduction Refinance Loan or IRRRL, is a VA refinancing loan that allows you to secure a lower interest rate or change your loan term at little to no cost.
VA Streamline refinances have minimal paperwork and only require that you currently have a VA loan with no recent late payments.
A VA Cash-Out refinance allows Veterans from any loan program—FHA, USDA, VA or conventional—to cash out the equity they’ve built in their home. These loans are ideal for Veterans who want to use their home equity to pay off high-interest debt, home renovation projects or cover unexpected expenses such as medical bills.
VA loans have minimal upfront requirements, making them ideal for Veterans who may not qualify for other refinancing options, such as conventional or FHA loans. Some key advantages of refinancing with a VA loan include:
One of the most obvious benefits of refinancing is the ability to extract cash from the equity in your home with a VA Cash-Out refinance.
One major benefit of VA loans is their low-interest rates. Because VA loans are backed by the government, Veterans can enjoy these attractive rates. A VA Streamline refinance (IRRRL) could provide you with a reduced rate and lower monthly mortgage payments.
Other refinance products may have high upfront fees and closing costs than a VA refinance. With a VA refinance, you’re required to pay the VA funding fee, which is 0.5% to 3.3% of the loan amount depending on which option you choose. However, there are VA funding fee exemptions for Veterans with service-related disabilities, surviving spouses and active-duty service members with Purple Hearts.
It’s important to note that VA lenders will still have their own additional costs for processing your VA refinance. Make sure to check with your lender’s requirements.
Those already holding a VA loan looking to use a VA Streamline refinance may be happy to hear that a second VA appraisal is not required.
To be eligible for VA loan refinancing, you must meet one of the following:
Note: This is the same eligibility criteria as purchasing a home with a VA loan.
The VA has very broad requirements for its refinancing programs. While these qualifications can vary from lender to lender, most lenders will look for a credit score of 620 or higher, a debt-to-income (DTI) ratio no greater than 41%, two years of consistent employment and enough residual income to meet the requirement for your area.
Some lenders may accept lower credit scores in exchange for a less favorable interest rate. You could qualify with a higher DTI ratio, but you'll likely need certain compensating factors, such as deeper cash reserves, a higher credit score or more residual income.
It’s important to note, however, that Veterans using the VA IRRRL program may be exempt from certain eligibility requirements. For example, your credit score won’t be run again when using this refinance product. This is because you had to meet the requirements to get the VA loan in the first place, so there is no need to repeat the process again.
Veterans who bought their home with a VA loan aren’t required to refinance with another VA loan. For some Veterans, it may be more beneficial to refinance with another loan program. Here is how a VA refinance compares to other refinancing options.
| Type | VA Refinance | FHA Refinance | USDA Refinance | Conventional Refinance |
|---|---|---|---|---|
| Credit Score | 620* | 580 to 620 | 640 | 620 |
| DTI Ratio | 41% | 43% to 57% | 41% | 45% |
| Mortgage Insurance or Funding Fee | 0.5% to 3.3% of loan amount | Upfront MIP of 1.75% and annual MIP between 0.45% and 1.05% | Upfront guarantee fee of 1% and annual fee of 0.35% | PMI between 0.58% and 1.86% (this is waived when home equity is above 20%) |
| Home Equity Requirement | Varies by lender | 20% | Varies by lender | 20% |
*There is no minimum credit score required by the VA, but most lenders look for a credit score of at least 620.
One reason to consider an FHA refinance is your credit score. Some lenders can accept credit scores as low as 580.
If your debt-to-income ratio is above 41%, an FHA refinance option might make more sense. The standard DTI ratio for FHA loans is 43%. Some lenders' DTI requirements can be as high as 57%, with certain compensating factors.
Similar to VA-backed mortgages, USDA home financing is known for its lower interest rates and no down payment. If you currently have a USDA loan on your property, refinancing with a USDA loan could help you save on paperwork and time.
The USDA refinance program is a great option for rural homebuyers wanting to secure a reduced interest rate and lower payments.
While VA loans are known for their lower interest rates, there could be times when conventional mortgage options offer competitive or even lower rates.
If you are looking to buy another primary residence with a VA loan, a conventional refinance can help pave the way toward a second VA mortgage loan. The VA requires the home to be your primary residence that you occupy full time, but once you refinance into a conventional loan, you are free to occupy the home as you see fit.
The cost to refinance with a VA loan depends on the loan that you choose. For IRRRL loans, you'll pay an upfront funding fee, which is 0.5% of your loan amount. For cash-out refinancing, you'll pay 2.15% of the loan amount if it’s your first time using your VA loan benefit and 3.3% for every subsequent use.
Veterans with service-related disabilities, surviving spouses and active-duty service members with Purple Hearts are exempt from these funding fees.
Most lenders require you to wait at least 210 days before you can refinance a VA loan. This is usually calculated from the due date of your first mortgage payment. For instance, if January 1 was the due date of your first mortgage payment, you'd have to wait until July 30 before you could refinance. The number of days can vary by lender, so be sure to communicate beforehand.
A VA refinance is a great option if you can lock in a lower interest rate or need to pay off high-interest debt, finish equity-boosting home renovations or cover emergency expenses. The VA refinance loan program offers Veterans multiple options to fit their needs.
General Disclaimer: Refinancing your existing mortgage may increase your total finance charge over the life of the loan.
