Three Options to Refinance Into a VA Home Loan

Veterans Affairs mortgages, or VA loans, have become lifesavers for homeowners struggling to refinance with conventional loans.

Low mortgage rates and tighter underwriting standards have led to a huge demand for VA loans from refinancers, says Michael Frueh, loan guaranty director for the Department of Veterans Affairs.

The biggest advantage of refinancing with a VA home loan is that homeowners can refinance up to 100 percent of the home's value, and they don't have to pay for mortgage insurance. A non-VA home loan normally requires some equity in the house.

"As values in the market continue to stabilize, veterans can take advantage of lowering their interest rates to today's unprecedented lows," says Deborah Ames Naylor, executive vice president of mortgages at PenFed, the Pentagon's credit union.

If you are a member of the military on active duty, a veteran, a reservist or a member of the National Guard, here are some refinancing options you may consider when it comes to a VA home loan.

Homeowners who already have a VA home loan can reduce their monthly payments or shorten the term of their loans through a streamline refinance program known as the interest rate reduction refinancing loan, or IRRRL.

One of the biggest advantages of refinancing through this program is that the process requires minimum documentation. The VA does not require a credit check or appraisal for refinances under IRRRL. Some lenders will still require these, as they have their own internal rules.

"An IRRRL loan typically offers a more streamlined approval and underwriting process," says Nicole Alley, a spokeswoman for USAA, a financial-services provider for military families. "An appraisal may be required based on the lender or loan's current servicer."

Borrowers refinancing an existing VA home loan through this streamline program pay a lower funding fee than they would pay under other VA loan options. The fee generally is 0.5 percent of the total loan amount and can be added to the loan balance. The program allows refinances up to 100 percent of the home's value.

The refinance cannot be used to pay off a second mortgage, Naylor says. Borrowers who have a second mortgage would need approval from the second lender to have the loan subordinated.

The VA offers a cash-out refinancing program for veterans who have equity and who have an existing VA home loan.

Cash-out refinancing is an option for homeowners who have two mortgages and want to refinance them into one loan. Unlike the IRRRL program, this refinance allows the borrower to pay off first and second loans with the new loan, Naylor says.

Homeowners who have equity in their homes may get cash back when refinancing, according to the VA rules. Some lenders may not allow cash-out refinances because of their internal rules. Most lenders allow the homeowner to refinance up to 100 percent of the home's value to pay off the old mortgages.

If you don't have a VA home loan but would be eligible for one, you may refinance your conventional mortgage into a VA loan.

Generally, most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA home loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.

"If they apply to refinance a non-VA loan into a VA loan program, it is considered to be a cash-out refinance by the VA," Naylor says. "This means that the veteran would need to be eligible, and they would be assessed the appropriate VA funding fee based upon eligibility."

Active-duty members normally pay a funding fee of 2.15 percent of the total loan amount. The fee can be added to the loan balance.

It falls under the cash-out refinance program, but that doesn't mean the borrower actually gets cash back, as many lenders won't allow it. But generally, the homeowner can refinance up to 100 percent of the home's value, which is a huge plus in the current lending environment.

"Clearly the biggest advantage is the availability of 100 percent financing," Naylor says.