How to refinance a VA mortgage loan

Fortunately for veterans, VA mortgages can often be refinanced quickly, easily and inexpensively.

Also, because VA lenders are fully guaranteed against losses by the U.S. Department of Veterans Affairs, VA mortgage rates sit about a quarter-percentage point lower than conventional mortgages.

The most common type of VA refinance is known as the VA "streamline refinance," or the Interest Rate Reduction Refinancing Loan (IRRRL). This is a VA-to-VA refinance.

Benefits of a VA IRRRL refinance

No. 1: No cash at closing

You are not required to bring in cash to close your VA refinance. Instead, you can finance the closing costs into your loan amount. Your maximum loan amount is calculated by taking the existing VA loan balance, plus the following:

• Allowable fees and charges, including a maximum of 2 discount points

• The cost of allowable energy-efficient improvements (up to $6,000). Improvements must have been completed within 90 days preceding the funding of the loan for you to be reimbursed for them.

• The funding fee (1.5 percent)

In the most common IRRRL, where an existing fixed-rate loan is being replaced with a new fixed-rate loan, the interest rate break for the new loan must be at least a half-percentage point (50 basis points).

You can refinance a fixed-rate VA loan to an adjustable-rate VA loan, but the interest rate break must be two full percentage points (200 basis points), and there are rules regarding the use of points to discount the interest rate.

No. 2: Easy credit requirements

As long as you are current on your VA mortgage, you are not required to have good credit to get your IRRRL approved. There is no credit underwriting performed unless your payment will increase by 20 percent or more or you are more than 30 days behind on your current home loan.

However, if your credit has been affected by an active Chapter 13 bankruptcy, your new refinance may have to be approved by the bankruptcy trustee or judge.

No. 3: No appraisal or current employment required

In most cases, no appraisal on the property and home is required. The no-appraisal requirement is a boon to those whose homes have little equity or may have even lost value and who would otherwise not qualify for a traditional mortgage refinance. You don't need to document your income. In fact, you don't even need a job or a new certificate of eligibility either.

Here's more information:

VA cash-out refinance

Another type of VA refinance is the VA cash-out refinance. With this type of loan, you can refinance a VA loan while also taking cash from the home’s value. (You aren't allowed to take cash out with an IRRRL.)

With this type of loan, borrowers may be able to refinance up to 100 percent of their home's value. Money from a cash-out refinance can be used to fund home renovations, college or paying off debt.

It is important to note that with a VA cash-out refinance, all borrowers must undergo a credit check and full underwriting. This differs from the IRRRL refinance, which does not have those requirements.

Going from a conventional to a VA loan

If you are eligible for a VA home loan but have a conventional mortgage, it might make sense to refinance to a VA mortgage if you qualify. You will need to prove that you are eligible to receive a VA loan by presenting a Certificate of Eligibility. The Department of Veterans Affairs details the exact requirements to obtain your COE. You can apply online, through your lender or through the mail.

Refinancing from a VA loan into a conventional loan

If you meet qualifications, you can certainly refinance out of a VA-backed loan into a conventional or FHA-backed loan. In fact, there may be some advantages to doing so; for example, a new conventional mortgage wouldn't require paying the VA funding fee again. However, there are also advantages to taking a new VA-backed loan in an IRRRL refinance. For example, if you have a very low equity stake in your home or your credit isn't great, you might not be able to get a rock-bottom interest rate even if you can qualify for conventional financing.

Protections for military homeowners

If you happen to run into financial trouble once you have your VA loan, the Consumer Financial Protection Bureau (CFPB) issued a host of new foreclosure protections for military mortgage borrowers that began back in 2014. These changes help better protect service members and military families in need of mortgage help:

• Comprehensive help: In years past, service members sometimes applied multiple times for mortgage help, sending in the same information and documents time and again. Now one submission should be enough. Servicers have to exhaust all potential mortgage-relief options once an application is received.

• Clear communication: Servicers and lenders no longer can shuffle military members from person to person. Servicers must now assign a representative to work with the individual homeowner and keep close tabs on all documents and related paperwork.

For military homeowners who are underwater and looking for assistance, a permanent change of station (PCS) triggers automatic eligibility for a short sale. Military members with VA mortgages can also pursue the VA's short sale program.

Given the streamlined process, all veterans should consider a mortgage refinance with the VA to help make their home loan more affordable.

Beware Loan "Churning"

While refinancing a VA loan can produce value for the homeowner, not all refinances end up being beneficial. Back in 2017, the Consumer Financial Protection Bureau and the VA teamed up to issue their first "Warning Order" regarding unsolicited refinance offers that contain questionable elements. In it, they cautioned VA loan holders against lenders marketing VA mortgage refinances who may use "aggressive and potentially misleading advertising and sales tactics."

Some of these tactics resulted in veterans and servicemembers refinancing on multiple occasions with terms that did not provide them with any clear benefit. This "churn" of existing VA mortgages caught the attention of the VA, the CFPB and Ginnie Mae, the secondary market maker for mortgages backed by VA guarantees. Ginnie Mae implemented stricter guidelines to help prevent churning, including a minimum period of six months where payments have been made on the existing loan and a minimum 210 day period before any VA refinance can happen.

All that said, there is no limit on how many times you can do an IRRRL refinance, provided each loan is 210 days old, six payments have been made and there is at least a 50 basis point break in the new loan's interest rate. This means that if you bought a home using a VA loan at 7.75%, you will be able to use an IRRRL refinance when rates reach 7.25%, 6.75%, 6.25% and so on. As rates fall, you have a low-cost means of getting a new rate.

Such serial refinancing isn't without cost, though -- you'll be re-starting the "amortization clock" over each time. In the four-rate cadence above over a two-year period, the last refinance could re-start your loan at a new 30-years -- and you could end up paying for your home for a total of 32 years. You'll have to consider total interest costs over time to know if you've actually saved any money. HSH's Should I refinance my mortgage?" can do the side by side calculations for you, showing exactly when a new loan may start costing you money -- even if it has a lower interest rate.

Getting approved for a VA refinance

You do not have to refinance with your current VA mortgage lender; in fact, you are encouraged to shop around to compare VA rates and fees from several lenders to find the best deal. Since the government does not set VA mortgage rates, different lenders will have different interest rates and terms.

The only required fee is the VA's funding fee. Mortgage lenders may charge other fees, but all other fees besides the funding fee are imposed at the lender's discretion.

Primary residence and second mortgage questions

You can refinance your VA loan to a new VA loan with no added fees, even if your home is no longer your primary residence; you just need to certify that you used to occupy the home as your primary residence.

If you have a second mortgage, you need to get the second mortgage re-subordinated to the new loan. Your second lien lender will need to agree to do so, and may require a fee, but the escrow company or your new lender should be able to make these arrangements  for you.

(Gina Pogol, Michele Lerner, Richard Barrington and Tim Manni contributed to this article)

(Image: iStock)