Unlocking VA Loan Refinance during Forbearance

VA loan forbearance is a lifeline for veterans facing financial challenges, offering financial relief from monthly mortgage payments. This comprehensive guide will walk you through the benefits, eligibility criteria, application process, and what happens during and after forbearance.

How to Qualify for VA Home Loan Refinance

To qualify for a VA home loan refinance, you must meet the mandated waiting period of 212 days or the equivalent of six payments — whichever duration is more prolonged. This waiting period is applicable regardless of the specific VA refinancing option you decide to pursue.

To be eligible for a VA streamline refinance mortgage, you must have an existing mortgage guaranteed by the VA. It’s essential to reside in the home you intend to refinance to qualify for a VA streamline refinance loan, and the new loan must be used to refinance the original VA loan.

  • VA’s Unique Feature: Refinancing during forbearance is a resounding “Yes” for VA loans, setting them apart from conventional, FHA, or USDA loans,
  • Waiting Periods: There is no waiting period for refinancing post forbearance as long as six consecutive payments were made before the forbearance period.

VA Cash-Out Refinance

The VA cash-out refinance permits you to leverage 100% of your home’s equity. This choice enables existing VA loan homeowners to access funds from their home’s equity for diverse purposes. It proves especially beneficial if you have existing loans to manage, as it empowers eligible homeowners to refinance various types of loans into a VA loan.

Home Equity Loan vs VA Cash-Out Refinance

A home equity loan and a VA cash-out refinance are both financial tools that allow homeowners to tap into the equity built in their homes, but they differ in key aspects. A home equity loan is a second mortgage that grants a lump sum based on the home’s equity, with a fixed interest rate and predictable monthly payments. This option is ideal for specific, one-time expenses.

VA cash-out refinance is exclusive to eligible veterans and military personnel and is designed to replace the existing mortgage with a new one, often offering better terms. We asked Dana Hendrix from DSLD Mortgage, a specialist provider of VA loans, to explain the difference between a home equity loan and a VA cash-out refinance. He told us:

“Unlike a home equity loan, a VA cash-out refinance allows borrowers to access up to 100% of their home’s equity. This provides greater flexibility for various financial needs, such as debt consolidation, home improvements, or unexpected expenses. While a home equity loan is an additional loan, a VA cash-out refinance replaces the original loan, offering a unique financial advantage to qualified individuals.”

VA Streamline Refinance Loan (IRRRL)

A VA streamline refinance loan, officially known as an Interest Rate Reduction Refinance Loan (IRRRL), is a special mortgage refinancing option exclusively available to veterans and active-duty military members with existing VA home loans. The primary purpose of the VA IRRRL is to help eligible borrowers obtain more favorable loan terms, typically by reducing their interest rates and, in some cases, adjusting other aspects of the loan.

The VA IRRRL prohibits borrowers from taking cash out of their home equity. Its purpose is to refinance the existing loan with improved terms rather than provide additional funds.

One of the distinctive features of the VA IRRRL is its streamlined documentation process. Verification of income, employment, and credit is often simplified or not required.

Additionally, a VA streamline refinance normally does not require an appraisal or home inspection. The home’s original appraised value is often used, even if the property’s value has changed.

VA Loan Refinancing Closing Costs

VA streamline refinance loans, and VA cash-out refinance loans do involve certain closing costs. One primary component is the VA funding fee, a one-time charge imposed by the government to offset expenses related to providing loans without down payments or monthly mortgage insurance. You can either pay the entire fee during the loan closing or incorporate it into your loan, distributing the cost across your monthly payments.

It’s important to note that certain borrowers are exempt from the VA funding fee. This exemption applies to veterans receiving VA compensation for a service-related disability, select surviving spouses of veterans who passed away during service, and active-duty military members honored with the Purple Heart.

Beyond the VA funding fee, additional closing costs are determined by individual lenders. The specifics of these costs can differ based on the lender you choose for your VA streamline refinance.

VA Refinancing: Take Away

Whether considering a VA cash-out refinance for its flexibility in utilizing 100% of home equity or contemplating a streamlined VA IRRRL for lower monthly payments, it is crucial to assess your long-term financial situation. Remember to factor in interest rates, the loan duration, the VA funding fee, closing costs, and the specific benefits each option provides you with.