How to Refinance a VA Loan

VA loans have remained popular over the past several years. In 2022, Veteran Affairs backed a total of 746,091 loans. During the second quarter of 2023, the VA backed 87,931 loans.

VA loans are a great option for eligible veterans, active duty service members and their spouses. Along with offering a zero-dollar down payment option, VA loans are known for having lower rates than traditional mortgages.

The VA doesn’t serve as an actual lender. Instead, private VA loan lenders originate the mortgages and handle the application process. The VA home loan program guarantees a portion of the loan, which allows lenders to offer financing to borrowers with lower credit scores and without requiring a down payment.

Moreover, it also means that VA lenders are required to offer what is often called a “streamline refinance.” So, if you are refinancing a VA home loan in order to obtain a lower rate, you won’t need to go through an appraisal process or submit documentation that the VA already has on file.

Read on to find out what you need to know about getting the best VA loan rates, refinance options, requirements and more.

Table of contents

1. VA loan refinance options
2. The streamline refinance
3. Cash-out refinance
4. Who is eligible for a VA loan refinance?
5. VA loan refinance rates
6. How often can I refinance my VA loan?
7. Tips for refinancing a VA loan
8. VA loan refinance FAQs

VA loan refinance options

There are a few reasons to consider a VA home loan refinance. You can use a VA refinance to change the terms of your loan and get a lower interest rate or lower monthly payments, and even to pay off debt by taking out cash from your home equity.

You’ll have two options when it comes to refinancing your current mortgage:

The VA streamline refinance

Interest rate reduction refinance loans (VA IRRRL), also known as streamline refinances, are available to existing VA loan holders.

To qualify for an IRRRL, for a fixed-rate loan to fixed-rate loan refinance, your new interest rate must be at least 0.5% lower than your current rate. If you're refinancing a fixed-rate mortgage into an adjustable-rate mortgage, the starting rate must be at least 2% lower.

Beyond that, there are few requirements for applying.

Unlike with a conventional refinance, you aren’t required to get a new appraisal, saving you time and money. There are also no underwriting fees and no minimum credit score requirements or income documentation needed. You will need to go through the lender's application process and take care of closing costs, but you can roll the latter into the loan if you can’t pay them up front.

“It’s intended to be a simple, low cost, no-frills refinance option that solely exists to get veterans into lower rate VA mortgages or out of adjustable-rate loans,” says Chris Birk, vice president of mortgage insight at lender Veterans United Home Loans.

The VA cash-out refinance

With inflation higher than the U.S. has seen in years, you may want to look into a mortgage refinance to get access to cash. Specifically, a VA-backed cash-out refinance loan lets you replace your current loan with a new loan under different terms, and allows you to get cash from your current home equity.

If you meet the military service requirements, you can refinance any existing loan — whether it's a VA, conventional or FHA loan — into a VA cash-out loan. There are two types of cash-out loans:

• Type I: This is a mortgage where you're not taking out extra cash, just switching to a new loan type.
• Type II: This is a mortgage where you're taking out extra cash.

The advantage of a cash-out refinance is that you can convert a higher-interest-rate loan into a lower-rate loan. You can also take advantage of your home's equity to get cash back to use for home improvements, emergency costs or other important expenses.

With a cash-out loan you can refinance up to 100% of the appraised value of your home.

Unlike an IRRRL, you will need to meet both VA and lender eligibility requirements to qualify for a cash-out. You’ll also need to have your home appraised and go through the underwriting process.

Who is eligible for a VA loan refinance?

Another way in which a VA refinance differs from a conventional refinance is that the transaction has to provide a tangible benefit for the borrower, according to Birk. This means that, to qualify, your lender must offer you a lower interest rate or monthly mortgage payment than what you currently have.

To access VA benefits for home loans, you must meet one of the following conditions:

• You've completed at least 90 continuous days of active duty service (or double that amount if you served during peacetime)

• You're a veteran or a National Guard or Reserve member who meets the minimum service requirements for your time in service — usually six years

• You're the surviving spouse of a service member who died while serving or as a result of a service-related disability

• You may also be eligible if you were discharged for hardship, government convenience, an early out, reduction in force, certain medical conditions or a service-related disability

For an IRRRL refinance, you must also meet the following requirements:

• You already have a VA-backed loan

• You are using the IRRRL to refinance your existing VA loan (If you have a second mortgage, the lien holder must agree that the new VA loan will be the first mortgage.)

• You can certify that you're currently living in the home the loan covers or have lived there in the past

• You have the Certificate of Eligibility from your current VA loan

For a cash-out refinance, you must meet the following requirements:

• You qualify for a VA Certificate of Eligibility based on your service time

• You meet both the VA’s and your chosen lender’s financial requirements, including minimum credit score standards, required debt-to-income ratio (DTI), plus any other requirements set by the lender

• You live in the home you wish to refinance

Just as you can buy a house with bad credit, you can also get a VA refinance loan with bad credit, given that some lenders will even work with buyers with credit scores as low as 580. Each lender sets its own minimum credit score requirement, but most VA loans can be obtained with a score as low as 620. A general rule of thumb for DTI is 41% or less, although some lenders may go as high as 60%.

VA lenders will consider recoupment as part of the loan approval process. “It’s a way to think about whether or not getting a refinance is a good idea or not,” says Birk.

Recoupment is basically determining how long a borrower will take to recover the costs of refinancing a loan, also known as the breakeven point. VA guidelines set the recoupment period as 36 months or less.

If the VA approves your loan application, they'll give you VA loan entitlement. This is the maximum amount that the VA will guarantee to repay your lender if you default. As a result, you don't need private mortgage insurance, or PMI, to be eligible for VA loan refinancing.

VA loan refinance rates

Refinance mortgage rates are volatile and can change daily. In general, VA mortgage loan rates are lower than conventional mortgage loan rates.

As with any type of mortgage loan, a VA refinance loan will have associated closing costs. These range between 1% and 5% and include items such as appraisal fees for cash-out refinances, origination and other upfront costs, taxes, and commissions.

In addition to standard closing costs, you’ll also have to pay the VA funding fee. For IRRRL refinance loans, the fee is 0.5% of the loan amount. For cash-out refinances, the fee is 2.3% of the loan amount if it’s your first time using the VA loan benefit, or 3.6% if it’s a subsequent use of the benefit.

There are exceptions. If one of the following is true, you're exempt from paying the funding fee:

• You have service-related disabilities
• You were awarded the Purple Heart
• You are the spouse of a veteran who was disabled
• You are the surviving spouse of a veteran who died while in service or from a service-related cause

Whether you’re shopping for a conventional mortgage or refinancing options during your home-buying process, it’s always important to look for the best mortgage lenders for your financial situation. When shopping for a lender, look into their interest rates, loan terms, reviews and mortgage insurance requirements.

How often can I refinance my VA loan?

There is no limit to how many times you can refinance your VA loan, be it an IRRRL or a cash-out option. However, there is a minimum waiting period you need to observe before you can refinance.

You must wait at least 210 days from the date of the first payment you made on the loan you want to refinance, and you must have made at least six consecutive monthly payments.

Tips for refinancing a VA loan

When refinancing a VA loan, you should follow these common mortgage tips:

1. Compare lenders

To find the best rate and loan terms when you apply for a VA loan, contact multiple lenders to see which one offers the best overall deal. Submitting multiple applications for the same loan type within a two-to-four-week period won’t affect your credit score. The reporting bureaus will count them as a single hard credit pull rather than multiple pulls.

The difference in rates offered to the same VA borrower by different mortgage lenders can be as high as 1.25%, according to a 2022 study by mortgage brokerage Own Up. Taking the time to talk to different loan officers to find the best rate can result in significant savings in interest over the life of the loan.

2. Determine what type of refinance loan is best for you

Decide what your refinancing goal is. Do you just want to reduce your interest rate and monthly payment? Then go with the IRRRL. Do you need to pay some unexpected bills and want to use your home equity? Then go for the cash-out refinance. A cash-out is also your only option if you are refinancing into a VA loan from a different type of mortgage.

3. Consider the cost of the loan

As with any refinance you want to make sure it’s worth the cost. Converting an old loan into a new one involves closing costs and fees that can make the refinance more expensive than you originally thought. You must calculate how long it will take you to break even on the cost of refinancing to make sure it makes financial sense. Because of recoupment, a VA lender might not allow you to refinance if you won’t break even soon enough.

To calculate the breakeven point, divide the cost of all fees, expenses and closing costs by the amount you’ll save each month with the new loan. Also, consider how long you plan to stay in the home. If you'll be moving before you reach your breakeven point, it may not make sense to refinance. You won’t recover your costs.

4. Gather any required documentation

As with any other type of loan refinance, your VA lender will need you to present certain documents. For the IRRRL, that means the Certificate of Eligibility used in your previous VA loan.

For a cash-out refinance, the lender may ask for your W2s, two years’ worth of tax returns, and copies of pay stubs. Ask what other documentation may be required and get it together before applying.

More from Money:

• What Is a VA loan?
• 7 VA Loan Tips for Veterans, Service Members and Military Spouses
• VA Loans Don’t Require Down Payments. Should You Make One Anyway?