Can a VA Loan Be Used to Refinance

By David Rouse

The Department of Veterans Affairs (VA) allows eligible veterans to finance a home with little or no equity. This benefit began in 1944 as WWII began to end. The U.S. government wished to ease the transition of millions of service people back into civilian life. The government chose to provide these veterans, and subsequent veterans, with a whole host of benefits including the VA loan program. Since 1944, numerous active duty personnel and veterans used their VA loan benefits to purchase and refinance a home.

The first time a veteran uses his VA loan benefit, the VA loan guarantee fee is lower than for subsequent uses. VA does not require the veteran to use the benefit to only purchase a home. If the veteran already owns a home, he may use his VA benefit to refinance the home. During the mortgage crisis in the late 2000s and early 2010s, some veterans refinanced their conventional mortgages into a VA loans because of the VA does not require monthly mortgage insurance and allows low or no equity.

The loans allow the consolidation of other debt into the VA loan as well when refinancing. These cash-out refinance loans offered by VA also allow veterans access to the equity in their homes for numerous other reasons. Veterans may choose to purchase another property with the funds, purchase a car, make home improvements or just about any other reason they choose. The loan being refinanced does not have to be a VA loan.

One specialty program only offered by the VA to veterans who currently have a VA loan is the Interest Rate Reduction Refinance Loan (IRRRL). This program does not require an appraisal, proof of income or proof of assets to qualify. The veteran cannot receive any funds back from loan transaction, and the new loan amount may not exceed the previous loan's original balance. If a second mortgage is present, the second mortgage lender may not be included in the new mortgage amount and must subordinate to the new first mortgage.

The VA does not lend directly to its veterans. Instead, it guarantees loans provided by lenders to veterans that follow all of VA's lending guidelines. VA charges the veteran a funding fee, which may either be paid at closing or included in the loan amount. The funding fee varies depending upon the type of service the veteran gave, if the benefit has been previously used and if this is a full new loan or an IRRRL. Additionally, VA allows veterans to finance up to $6,000 of home improvements into the loan if they increase the energy efficiency of the home.

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