The Rules on Refinancing When a VA Loan is Involved

Refinancing takes many forms, because there are many different situations in which a borrower would want to refinance. It’s not uncommon for a borrower to currently have a conventional loan and decide after a few years that it would be smart to use their VA loan benefits, so they refinance into a VA loan. Another situation might be that a borrower uses their VA benefits to open a new mortgage and would like to refinance using their VA benefits again. Both situations are common and not usually problematic to the borrower or the lender.

It makes perfect sense why someone would think that if they had a conventional mortgage the only option for refinancing is to refinance into another conventional mortgage. In fact, this was true for a long time, and only recently has it been changed to allow a conventional loan to be refinanced into a VA loan. As of the Veterans Benefits Improvement Act of 2008, this option has been available to VA-eligible borrowers who either already had a mortgage by the time they became eligible for a VA loan or opted not to use their VA benefits at first. It’s also possible for a VA loan to be refinanced into a conventional loan, but seeing as how this never provides the borrower with any benefit, not much detail is given on that option. From the VA: “Veterans with conventional home loans now have new options for refinancing to a VA- guaranteed home loan…These new options are available as a result of the Veterans’ Benefits Improvement Act of 2008, which the President signed into law on October 10, 2008. Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of the value of the property, which is up from the previous limit of 90 percent.”

As you can imagine, this is exciting news for veterans everywhere because it gives them more flexibility in using their VA benefits, as well as making the benefit even more substantial than it already was. To refinance from a conventional loan to a VA-guaranteed loan, the process is much like a conventional to conventional refinance combined with opening a new VA mortgage. In other words, there’s a lot to it. Someone refinancing to a VA loan will be met with a standard loan application, the normal credit checks and employment and income verifications, as well as all of the hoops of getting a new VA loan, including getting a Certificate of Eligibility (which you’ll need to do first thing), having an official VA appraiser appraise the value of the home, and all of the other wonderfully enjoyable steps to getting a VA loan.

However, don’t let those things stop you or even delay you in refinancing to a VA loan. The benefits available in a VA loan are substantial and can save you thousands of dollars a year in interest savings and lower monthly payments. For a conventional to VA refinance, the streamline refinance option offered by the VA, the Interest Rate Reduction Refinance Loan (IRRRL), is not available. The IRRRL is only available if the refinance is a VA loan to VA loan refinance. The borrower should also be prepared to expect that the refinance to a VA loan is going to use his or her entitlement amount. Each veteran only has a certain amount that they are eligible to have guaranteed by the VA, and the amount you refinance for will, in most cases, cut into that amount.

If you’ve used your VA benefits before, in order to use them again or refinance a conventional mortgage to a VA loan, you’ll need to furnish proof that you’ve completely paid off any amount owed on a VA loan that was previously opened. This proof can easily be combined with the application for restoration of entitlement. There’s a lot of flexibility built into the VA loan system – especially with refinances. This flexibility is intended to offer a variety of options for any kind of situation so that the veteran can choose the best option for them. In order to make sure you make the best decision for your new VA loan or refinance, consult with your loan officer or a VA-approved lender to get accurate and complete information on what your choices are.

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