Two Types of VA Refinancing in California
There is more than one type of VA refinance program available for California Veterans. While the most common type of VA refinance program is the VA Interest Rate Reduction Reduction Refinance, or VA IRRRL, the VA cashout refinance is also very a very popular VA refinance program.
What is a VA IRRRL?
A VA Interest Rate Reduction Refinance, also know as an IRRRL or VA Streamline Refinance, is only for current VA borrowers.You must already be in a VA loan. It offers a great benefit to current VA loan borrowers because it allows for an easy way to take advantage of improving interest rates.
- The Veteran must already have a VA loan
- No cash out is allowed. This program is strictly a “Rate and Term” refinance.
- No income documentation is needed. Employment is verified, but debt to income ratios are not reviewed.
- No asset verification, meaning no bank statements needed, unless the Veteran will need money to close the IRRRL.
- No appraisal or termite report required. This is the best part and makes the time to close a VA IRRRL very short since the lender doesn’t have to wait for an appraisal or termite inspection report.
- The Veteran must either be lowering their interest rate and payment, shortening the term (some qualifying requirements may be needed if the payment is going up), or going from an Adjustable Rate Mortgage to a Fixed rate.
The VA IRRRL is so easy to close that it is also advertised heavily by some lenders who don’t always have the Veterans best interest in mind. Current VA borrowers are used to receiving mailers from lenders offering interest rates that are “too good to be true” (in the words of many of my clients). Make sure to read the fine print, or contact a VA lender you trust for advice on whether a VA IRRRL makes sense for you. Also, while some lenders will advertise that you will “skip payments”, that is never the case with any type of refinance. Mortgage interest will be collected and paid on the loan being paid off every time. It’s just a matter of whether you choose to have it added to the new loan or pay it out of pocket. Make sure you know how much you will save monthly, as well as what the “breakeven” time period will be on your refinance. Make sure you will breakeven prior to when you think you will sell your home.
What is a “Cash Out VA Refinance“
Any VA refinance that is not an IRRRL is a “cash out refinance”. Even if the Veteran will not be receiving cash out at closing, VA still considers the refinance to be “cash out” if the borrower is refinancing from a non-VA loan. And why, you ask, would someone choose to refinance from a non-VA loan into a VA loan. There are many reason, including:
- VA interest rates tend to be lower than most other types of loan programs. And the interest rate spread widens in favor of VA for borrowers whose FICO scores are lower than 740, or are pulling cash out, or have a loan to value of 80% or higher.
- Some lenders will allow VA refinancing for borrowers with FICO scores as low as 580. That can’t be done with Conventional financing.
- VA allows “cash out” refinancing up to 100% of the property value. Conventional programs cap out at 80% of the value. Also, unlike Conventional financing, there are no “pricing adjustments” for the worse for pulling cash out with a VA loan.
- VA has much shorter wait periods after major credit events like a bankruptcy (2 years after discharge for VA versus 4 years for Conventional), foreclosure (2 years for VA versus 7 years for Conventional) or short sale.
- VA allows for higher debt to income ratios (no cap – not unusual to have debt to income ratios above 50% on a VA loan versus a cap of 45% on Conventional financing)
- Jumbo VA program allows for cash out at a much higher loan to value than standard Jumbo programs. For example, in Orange or Los Angeles counties, where the VA loan limit for 100% financing is $636,150, a Veteran could pull cash out to a little over 90% of the property value if the appraisal was in the $1,000,000 range. And it would be at a lower rate than comparable Jumbo programs.
Typical Uses of Cash Out from a VA Refinance
The Veteran can use the cash out for just about any purpose. But the most common purposes are listed below.
- Debt Consolidation. This is a great way to pay off high interest rate credit cards that you are carrying the balance on.
- Home Improvements. – with property values increasing over the past few years, Veterans now can take advantage of their equity and improve their homes, whether it is paint, flooring, a kitchen remodel, etc. Since the loan can be up to 100% of the property value, it acts as a far easier way to improve your home versus a construction loan.
- Refinance from a CalVet Loan. Because CalVet does not refinance, Veterans end up locked into an interest rate that is higher than the market. They aren’t able to do a VA IRRRL because their loan is CalVet, not VA. Refinancing their CalVet loan into a VA loan can lower their payment and give them access to the VA IRRRL if rates drop later.
- Education. College is expensive. Many Veterans will take advantage of the VA cashout refinance program to help cover college expenses for their kids.
- Pay off a HERO or PACE loan. The HERO loan program is used for energy efficient improvements to the home. It is most typically used for solar panels, but can include other energy efficient improvements as well. In many cases it is then paid through the annual property tax bill. Depending on the size of the HERO loan, the tax bill increase can catch some people off guard. And if they have an impound account for property taxes, it can also throw their lender off guard when the property tax bill comes in much higher than expected, resulting in the lender increasing the monthly mortgage payment to make up for the higher tax bill. Using a VA cash out refinance to payoff the HERO loan will put the property tax payment back down to a reasonable level.
For someone who has never had a VA loan it is important to know that VA does require a few things that are not required with other types of financing. With VA, there will most likely be an impound/escrow account for property taxes and insurance. This means you will pay 1/12 of your property taxes and homeowners insurance each month as part of your mortgage payment. Also, VA requires a clear termite report prior to closing. And the last important thing to know is that VA requires a Funding Fee on cash out refinances (and purchases). Depending on whether you have used VA financing previously, the Funding Fee can be as high as 3.3% of the loan. It can be financed into the loan amount. For Veterans who have a disability, their Certificate of Eligibility will inform the lender to waive the VA Funding Fee.
The best way to determine whether a VA refinance is for you, and what your option are, is to call a California VA loan offer who specializes in the VA loan program. The Loan Officer should be able to provide custom loan scenarios that will not only show the payment breakdown, but also accurately estimate the closing costs and cash going back to you.
Authored by Tim Storm, a California Loan Officer specializing in VA home Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.