Believe it or not, many people who are eligible for
VA home loans
actually wind up taking out conventional mortgages to buy or
refinance their homes. "I've been finding that there are retired
veterans who didn't realize that refinancing to a VA loan from
their conventional loan was even an option," says Tim Storm, a
certified mortgage planning specialist and
from Orange County, Calif.
If you are eligible for a VA home loan but have a conventional
mortgage, you probably had good reason for choosing the non-VA
loan, such as:
- You needed a sub-prime mortgage
- You couldn't properly document your income
- You had a down payment and chose to avoid the VA funding
- You wanted a Pay Option ARM, interest-only mortgage or other
- Your home's price exceeded the VA limits
- Your condo was not VA-approved
Today, however, it may be to your advantage to
to a VA mortgage if you qualify. If you have improved your credit,
been self-employed long enough for your income to be counted, if
your condo has obtained VA approval, or if you can get a better
interest rate with VA financing, it's time to think about making
the switch. You can begin by running some numbers through HSH.com's
which can give you an idea of what your potential savings will
VA loans can be better for those with less
"With the drop in property values over the past four or five
years, borrowers who had 20 percent equity or more are now in a
situation where they have no equity," says Storm. "Some are in
5-year ARMs and would like to refinance into a 30-year fixed loan.
Some have a second mortgage or equity line and would like to
combine the first and second into a new 30-year fixed mortgage. But
without 20 percent equity they are not able to get into a low
[-rate] conventional 30-year fixed loan without paying mortgage
insurance. VA rates are low--in many cases lower than conventional
rates--especially since VA does not have as many pricing
adjustments for property type, FICO, LTV, etc."
Refinance your subprime loan to VA
The Veterans' Benefits Improvement Act of 2008 made it possible
for veterans to refinance up to 100 percent of their homes' value,
an increase over the previous limit of 90 percent. One reason for
implementing this change was to "allow VA to assist a substantial
number of veterans with subprime mortgages to refinance into a
safer, more affordable, VA guaranteed loan," said Secretary of
Veterans Affairs Dr. James B. Peake in a 2008 press release.
"Veterans in financial distress due to high rate subprime mortgages
are potentially the greatest beneficiaries," he said.
How good does your credit have to be?
The VA's underwriting guidelines state, "In circumstances not
involving bankruptcy, satisfactory credit is generally considered
to be reestablished after the veteran, or veteran and spouse, have
made satisfactory payments for 12 months after the date of the last
derogatory credit item."
So if you have made all of your required payments on time for a
year, you have a decent chance of getting a refinance approved. If
you are in a debt management plan, you may be considered for a VA
refinance after 12 consecutive on-time payments have been made to
If two years have passed since a Chapter 7 bankruptcy or a
foreclosure, it can be disregarded. This may be possible after one
year if you have successfully reestablished credit and the
bankruptcy was caused by circumstances such as unemployment or
illness. You can refinance while in a Chapter 13 plan if you have
made 12 payments on time and the trustee approves.
You have to prove your income
You have to prove your income for a VA refinance. You salary is
counted if the underwriter determines that your employment is
likely to continue. Overtime, bonuses, commissions, and second-job
income only count once you have a two-year history of receiving
such income. Self-employment income counts once you have been in
business for at least two years. That said, you should still talk
to a loan professional. Just because your income was insufficient
or unverifiable the last time you applied for a loan doesn't mean
it is now.
Condos must be approved
Due to the recent popularity of FHA financing, many condominium
projects have made the effort to get approved with HUD in order to
attract more buyers. The VA accepts condos approved by FHA prior to
December 7, 2009. After that date, the condo association has to get
approved by the VA. You can find VA-approved condos and
FHA-approved condos online.
VA refinance versus HARP
If you have little home equity and your first mortgage is with
Fannie Mae or Freddie Mac, you may want to consider refinancing
through the Home Affordable Refinance Program (HARP). However, many
borrowers trying to refinance through HARP have run into
difficulties with their mortgage insurers and their current loan
servicers, or they don't care for the surcharges added by Fannie
and Freddie (which can be as high as 2 percent of the loan amount).
Here's a little comparison between the particulars of what HARP
offers versus what VA refinances offer:
Refinances up to 125% of the home's value
Refinances up to 100% of the home's value
Risk-based pricing adjustments
No pricing adjustments
Have to use current lender if you have mortgage
Can use any VA-approved lender
No mortgage insurance if current loan has none
Funding fee charged (can be wrapped into loan)
Exercise your right to a VA loan
Studies show only 25 percent of those who are eligible for VA
mortgages exercise their rights to have them. Mike Harrison, a VA
lending expert with Utah Home Group, says this may be due to a lack
of communication. "It doesn't ask on the standard mortgage
application if you are a veteran. If you are a veteran make sure
your lender knows it."
Another issue is that not all lenders are equipped to originate
VA loans. "Often lenders will not mention the VA mortgage because
they are unfamiliar with all of the guidelines," he says, but VA
mortgages may be the best for the borrower. "When I show a side by
side comparison of VA versus FHA versus Conventional, a VA mortgage
often will be the best option."
If you're thinking about refinancing, check with an approved VA
lender when you shop for your home loan. It might be the best
choice for your next refinance.