CalVet Loan to a VA Loan
The CalVet home loan program is a great way for a Veteran in California to buy a home. However, the VA loan program beats out the CalVet loan program in a lot of ways. A California Veteran looking to buy a home using their VA entitlement should look at both programs. This article is for those Veterans who financed their home purchase with a CalVet loan and now want to look at their refinance options.
The first thing to know is that CalVet does not do refinancing. The CalVet loan program is only for purchases. So what is a CalVet borrower to do if they want to lower their interest rate when rates go down? Or pull cash out for home improvements or debt consolidation when property values go up?
This is where is will be helpful to understand your options. Know when it makes sense to refinance a CAlVet loan into a VA loan with either a VA Interest Rate Reduction Refinance Loan (VA IRRRL) or a VA Cashout refinance. And know when it may make more sense to refinance in a Conventional loan. All options should be reviewed to make sure you are making the best decision.
The Problem: CalVet borrower has an interest rate that is at least .5% higher than current VA interest rates and just wants to lower the rate and payment. No cashout needed.
Interest rates fluctuate. They can move from one day to the next. Why stay in a loan with an interest rate that is .5%, 1% or more above current market mortgage rates? Every situation is different, but not taking advantage of the possibility of saving hundreds of dollars per month and thousands of dollars over the life of a loan is just not smart. Even if you feel that you can easily afford your payment just think what could happen if you made the same payment you are making now but at a lower interest rate. You could end up taking years off your loan payoff. So what is the best option for a "Rate and Term" refinance out of a CalVet home loan?
The Solution: The VA IRRRL, also known as the VA Streamline Refinance
The VA IRRRL is probably the best mortgage refinance available, at least for those that are eligible. Most CalVet home loans are backed by VA, making them eligible for a VA IRRRL. VA IRRRL is an acronym for VA Interest Rate Reduction Refinance Loan. It is also known as a Streamlined Refinance since No Income Documentation is Required, No Appraisal is Required, and No Assets are required. As long as you are making your payments on time along with a few other qualifying requirements (.5% lower rate and breakeven in 36 months or less on the refinance).
Not all VA lenders know how to do a VA IRRRL from a CalVet loan. CalVet uses an unusual method of financing known as a Land Contract. If your lender gets hung up trying to figure it out then contact a lender who specializes in CalVet to VA refinancing.
The Problem: CalVet borrower has owned their home for a few years and property values have gone up. They would like to consolidate some credit cards and also update their kitchen. They have a VA Disability rating of 10% or more.
When property values go up it can be nice to take advantage of the built up equity to put yourself in a better financial position. Or to make your home into your Dream Home, or at least something closer to your dream home. What are your options?
The Solution: The VA Cashout Refinance
The VA Cashout refinance is a "full qualifying" loan. Unlike with the VA IRRRL above, there will be an appraisal. The loan amount cannot be greater than 90% of the appraised value. Also, there will need to be a clear termite report prior to closing. And the borrower must have sufficient income to qualify for the new payment.
Let's assume a California Veteran purchased his property a few years ago for $400,000 with a $400,000 CalVet loan. Now the property is worth $500,000. The maximum VA loan would be $450,000 (90% of $500,000 value). The current balance of the CalVet loan is now $375,000. There is $75,000 equity available for closing costs, prepaid expenses, and cash out for debt consolidation and home improvements. Again. it's important to get with a California VA Lender who can prepare a VA Total Cost Analysis which will give you a full breakdown of the numbers prior to making the decision on whether a refinance makes sense.
An important fact to point out is the Disability Rating of 10% or more. By having a Disability Rating of 10% of more the VA Funding Fee is waived. Otherwise the VA Funding Fee will be 3.6%. In the example above, if the Veteran did not have a Disability Rating then approximately $15,500 would be added to the base VA loan. That adds a big fee that needs to be considered prior to making the decision to do a cashout refinance.
The Problem: CalVet borrower has owned their home for several few years and property values have gone up significantly. They would like to consolidate some credit cards and also update their kitchen. They DO NOT have a VA Disability rating.
The main difference between this problem and the last problem is the Disability Rating. What are the options for a cash out refinance if the CalVet borrower is trying to avoid a 3.6% VA Funding Fee?
The Solution: The Conventional Loan Cash-out Refinance
While VA allows cash-out to 90% of the appraised value, Conventional loan programs only allow cash out to 80% of the value. But if you don't have a Disability Rating then at least you won't have to pay the 3.6% VA Funding Fee.
Let's assume a California Veteran purchased his property several years ago for $400,000 with a $400,000 CalVet loan. Now the property is worth $550,000. The maximum Conventional loan for a cash out refinance would be $440,000 (80% of $550,000 value). The current balance of the CalVet loan is now $350,000. There is $90,000 equity available for closing costs, prepaid expenses, and cash out for debt consolidation and home improvements.
Because more equity is required to pull cash out with a Conventional loan, another option may be to get a Home Equity Line of Credit. HELOC's can go to 90% of the property value and in some cases even 95%.
Know Your Options
Understanding your options is important. Make sure to do a little bit of research and work with a lender who can show you the numbers in an easy to read and understand manner. You'll want to compare your current loan to several different options and review the payment, costs, and savings now and over time. Your lender should be able to provide you with a VA Refinance Savings Analysis that compares your current loan to your refinance options.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.