Can I Use a VA Loan to Refinance My Home

By Ciaran John

The U.S. Department of Veterans Affairs partners with mortgage companies to offer loan refinancing to eligible borrowers. The VA insures two types of refinance loans: cash-out refinances and Interest Rate Reduction Refinancing Loans. You must have an existing VA loan to qualify for an IRRRL, whereas you can use a cash-out loan to refinance a non-VA backed loan. The VA typically insures up to 25 percent of the loan amount in order to protect the lender from losses associated with borrower default.

You can qualify for a VA loan if you are currently serving in the Armed Forces. You can also qualify if you were formerly in the military and were honorably discharged or if you spent at least six years in the U.S. Coast Guard or the Selected Reserves. In some instances, surviving family members of deceased military personnel are also eligible to obtain VA loans. If you qualify, you must obtain a certificate of eligibility from the Department of Veterans Affairs and provide it to a VA-approved lender.

You can take out a refinance loan equal to up to 90 percent of the reasonable value of your home. The VA bases the reasonable value on an appraisal performed by a VA-certified appraiser. You must pay for the lender's mortgage insurance by paying an upfront insurance funding fee. You can roll the cost of the funding fee into your loan amount even if it causes the loan-to-value to exceed 90 percent. You can also exceed the 90 percent LTV to cover the cost of home improvements designed to make your home more energy-efficient, although the rolled-in cost cannot exceed $6,000.

Generally, cash-out refinance loans are loans used to pay off debts beyond just the mortgage, while straight refinance loans involve just paying off your existing first lien mortgage. Despite the name, you can use a VA cash-out loan both as a cash-out loan or as a straight refinance loan. You can use cash-out proceeds for any legal purpose, although people typically use loan proceeds to pay off existing debt or to pay for home renovations.

You can only use an IRRRL to refinance an existing VA-backed loan and you cannot receive cash back from the loan closing. However, you can roll your closing costs into the loan amount and increase the loan by up to $6,000 to cover the cost of home improvements that make your home more energy-efficient. Your new loan must have a lower interest rate than the existing loan unless you are paying off a variable rate loan with a fixed-rate mortgage. Your new loan term cannot exceed the original loan term by more than 10 years.

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