January 7, 2022
Requirements of a VA Loan Refinance
If you’re a veteran with VA loan eligibility, you may qualify for a VA loan refinance. The VA loan refinance programs have many benefits, including competitive interest rates and fees. Whether you’re a veteran, an active-duty member, or a surviving spouse of a veteran, you may be eligible. Eligibility and qualifying are two different things, though. Here’s what you must know about qualifying.
The VA offers two options to refinance – the VA IRRRL (VA Interest Rate Reduction Refinance) program and the VA cash-out refinance. The VA IRRRL program is for borrowers with a current VA loan who want to lower their rate, change their loan’s term, or refinance from an ARM to a fixed-rate loan but not receive cash out from their equity.
The VA cash-out refinance is for veterans who have or want a VA loan. With this loan, they can tap into their home’s equity, using the money for home improvements, debt consolidation, or other purposes.
Before you can refinance a VA loan for any reason, you must have made at least six payments or waited 210 days. The VA uses this time to make sure you can afford the obligation before allowing you to take on another VA loan.
The VA does not underwrite or fund the loan, but they have specific requirements VA lenders must follow for the VA to guarantee the loan. This means the VA will pay back the lender if you default on the loan but only if you meet the VA qualifying requirements.
Like any mortgage, the most significant concern is the credit requirements. Fortunately, VA refinance loans have flexible credit requirements, just like when you bought the home.
The VA specifically doesn’t require a minimum credit score. Most lenders; however, require a 620-credit score or higher. The exact credit score depends on which VA home loan refinance you’re applying for and your other qualifying factors. A VA lender’s responsibility is to make sure a veteran can comfortably afford the loan without a high risk of default.
Sometimes this has nothing to do with a credit score and more to do with a borrower’s income or, more importantly, their disposable income or money left over after paying monthly obligations.
If you have a credit score on the lower end, it’s good to have compensating factors such as a low debt-to-income ratio or higher disposable income than average to make up for it.
If you’ve built equity in your home, you may be eligible to tap into it using a VA cash-out refinance. The VA has more lenient guidelines than other cash-out loan programs, giving veterans access to up to 100% of their home’s value.
To qualify for a VA cash-out refinance, you must provide the lender with the following:
- Certificate of Eligibility
- Proof of income with your last month of pay stubs or two years of tax returns if you’re self-employed
- W-2s for the last two years if you work for someone
- Proof you paid your current loan on time in the previous 12 months
- An updated appraisal to determine your home’s value
If you aren’t interested in taking equity out of your home but instead want to refinance to lower your interest rate, change your term, or refinance out of an ARM, the IRRRL may be a good option.
This loan program is only for current VA borrowers. You must have used your VA benefit to buy your home to use this program. That’s just the start of the requirements.
If you have a VA loan, here’s what’s required to be eligible:
- You must have on-time mortgage payments for the last 12 months
- Proof that you currently live or have lived in the house as your primary residence
- Proof there is a net tangible benefit to refinancing
The IRRRL program doesn’t require a specific credit score, proof of income, proof of assets, or a new home appraisal. But each lender has their own rules. The VA however allows lenders to use the information from your purchase loan to qualify for the IRRRL.
The key is that you have a timely mortgage payment history, AND you benefit from the refinance by saving money or getting out of a ‘riskier’ mortgage like an Adjustable Rate Mortgage (ARM) you prove you can afford your current loan and the new loan saves you money, you’ll be a good candidate for the IRRRL program.
Just like when you bought your home with your VA benefits, the VA requires specific Minimum Property Requirements when you refinance to ensure the house is safe, sound, and sanitary.
The MPRS include:
- Sufficient living space for your family size
- Year-round street access to the home
- No encroachments
- Proper water drainage
- Proper and working utilities
- Safe water supply
- Proper sewage disposal
- No defective conditions
To refinance your VA loan, you’ll need your Certificate of Eligibility (COE). Once you prove eligibility, you can refinance using the IRRRL (streamline) or the VA cash-out refinance program. Both programs have flexible guidelines allowing you to refinance at competitive rates and fees.
Before you choose the VA to refinance program that’s right for you, think about what you want out of the loan and what qualification factors you have so you get the most out of your loan program.