Included in the first Servicemen’s Readjustment Act of 1944, commonly referred to as the “G.I. Bill” were several provisions in an effort to help soldiers returning from WWII more readily adjust back to civilian life. One of the most enduring, popular of these provisions is the VA home loan program. The VA loan program helped those more easily buy a home as the loan required zero down payment, which was much different in those times when banks could require a down payment of 20%, 30% or even more. Further, when lenders approved a loan using the VA issued guidelines the lender would then receive a guarantee of 25% of the loss should the loan ever go into default. In addition, the VA program restricts the veteran from paying certain closing costs keeping cash to close to a minimum. For those who are eligible for a VA loan and are seeking a mortgage program requiring as few funds as possible, the VA loan is the ideal choice.
Other government-backed mortgage programs such as FHA and USDA are also guaranteed but the FHA loan requires a minimum down payment of 3.5% of the sales price while the USDA program is restricted to certain geographical areas and designed to finance homes in rural areas. VA loans carry no such restrictions. FHA and USDA loans also have a monthly mortgage insurance premium to help finance the lender’s guarantee yet the VA loan has no such monthly mortgage insurance payment. This increases the veteran’s buying power by reducing the overall monthly payment. The VA guarantee is financed by what is referred to as the Funding Fee and can vary based upon terms of the loan and usage. For example, a first time buyer using the VA home loan program the funding fee is 2.15% of the loan amount but is not an out of pocket expense and is rolled into the final loan. The maximum VA loan for 2018 is $453,100, an increase from the 2017 limit of $424,100. In areas deemed “high cost” the maximum loan amount will be higher.
VA loans can be used to purchase a primary residence up to four attached units. This means a single family home, duplex or 2-4 unit property as long as the borrower occupies one of the units. And VA loans come with an extra bonus providing multiple choices when a refinance makes sense. Let’s take a closer look at the various was a VA loan can be used when refinancing.
Traditional VA Refinance
Refinancing a VA loan is very much like financing the purchase. Lenders will need to see verification of income and employment. Income is documented by providing the lender with the most recent pay check stubs covering a 30 day period. A VA loan also requires a minimum of two years employment history which can be documented with copies of the last two years of W2 forms. For someone that is self-employed, two years of personal and federal income tax returns need to be provided.
As it relates to credit, most lenders ask for a minimum credit score of 620. The lender will request a new credit report and credit scores from the three main credit bureaus of Equifax, Experian and TransUnion. If there are two or more applicants, the lender will use the lowest middle score as the qualifying score. An appraisal will be needed to determine current market value. The veteran’s closing costs may also be rolled into the loan amount.
The Interest Rate Reduction Refinance Loan, or IRRL (Streamline Refinance)
Although a fully documented VA refinance is an option, it is rarely used when refinancing an existing VA loan into a new VA loan. With the IRRRL, or Streamline Refinance, very little paperwork is required. How little? The streamline requires no such documentation of employment. This literally means someone can be temporarily unemployed and still be able to refinance an existing VA loan. No employment verification also means no income verification which eliminates the need for pay check stubs, W2 forms and tax returns.
A reduced documentation streamline refinance doesn’t require an appraisal so valuation won’t be an issue. This is especially important in areas where property values have fallen. A streamline refinance can be used even though the value of the home has fallen below what is owed on the mortgage. There is no minimum credit score required but lenders can review a 12-month mortgage history. The only credit requirement for a streamline is having no more than one mortgage payment made more than 30 days past the due date and no such late payments within the previous six months.
A streamline refinance is an option as long as the veteran is lowering the monthly payment, reducing the loan term or switching out from an adjustable rate loan into the stability of a fixed. The borrowers can roll in closing costs but cannot pull out any additional cash when refinancing with a streamline.
A VA cash-out refinance is a loan that puts extra cash in the veterans’ bank account when closing on a VA refinance loan. Say that someone owes $150,000 on an existing VA home loan and wants to get out of a hybrid mortgage and refinance into a low fixed rate. The property is worth $200,000. After closing costs and the funding fee, there is an additional $3,000 in closing costs leaving $47,000 in equity. A borrower can refinance out of the hybrid and into a fixed rate VA loan and tap into that equity in the form of cash at the settlement table.
A cash-out refinance loan is a fully documented loan and will require verification of income, assets and qualifying credit along with a new property appraisal to determine current market value of the home.
Conventional to VA Refinance
It’s also possible to refinance out of a conventional mortgage and into a VA loan. A conventional mortgage today is one where the bank approves the loan and assumes all the risk and most commonly approved using standards set by Fannie Mae and Freddie Mac. Refinancing out of a conventional mortgage and into a VA loan isn’t all that common but can be an ideal solution when property values have fallen or remain stagnant.
Conventional loans require there be at least a 10% equity position when refinancing. That means the new loan balance cannot exceed 90% of the current market value of the property. But if the loan-to-value is greater than 90%, a conventional loan cannot be used. However, a VA loan can be used to refinance out of the conventional loan due to the higher loan-to-value limits carried by VA loans.
VA loans provide a variety of advantages for those who are eligible for the program compared to other financing options. Even when it comes to refinancing, VA loans offer more flexibility than other mortgage programs can offer.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email firstname.lastname@example.org.