Posted on: January 4, 2017
There are different types of mortgage loans available to today’s consumer, each with slightly different guidelines. Some have inherent advantages so it takes some time to consider which loan type best suits your requirements. Let’s take a look at the different programs to see what’s right for you.
VA loans are available for eligible veterans, certain active duty personnel, borrowers with six years’ service in the National Guard or Armed Forces Reserves and other selected borrowers. Those without such service do not qualify for the VA loan. VA loans offer two types of refinancing, a standard or a streamline.
A standard VA refinance requires the borrowers to provide complete documentation of their loan file including a new appraisal, income and employment verification and fair credit. This loan is also known as a VA cash out refinance, and is typically only used when getting cash out or paying off a non-VA loan.
For those with a VA loan, there’s the VA streamline refinance, officially called the Interest Rate Reduction Refinance Loan, or IRRRL. This refinance in essence allows eligible borrowers to drop their rate with very little documentation, time, or money. No income or asset verification and no appraisal are required.
The streamline program may be used to finance a property that was previously occupied and a VA loan used to finance the original purchase. Only an existing VA loan may be eligible for the streamline program. No cash out is allowed.
All VA loans require a funding fee which can be as high as 3.3 percent of the loan amount and may be included in the final loan. For the VA streamline, the funding fee is dramatically reduced to as low as 0.50 percent.
For eligible homeowners, the VA loan is usually the cheapest and easiest option. However, in some cases, those looking to refinance might choose another loan type. Here are the main non-VA choices.
Conventional mortgages are those approved using guidelines established by Fannie Mae and Freddie Mac and are by far the most popular program. Almost every lender offers them and guidelines from lender to lender are mostly the same, with very few differences.
Mortgage rates on conventional loans are very competitive as lenders compete using the same programs. The best use of a conventional refinance occurs when the homeowners have at least 20 percent equity in the home. In this case, no mortgage insurance is required.
A VA refinance requires an upfront funding fee, which ranges from 0.50% to 3.3% depending on refinance type. But conventional loans don’t require an upfront fee. This could save Veterans money, provided they have enough home equity for a conventional refinance.
A conventional loan can also be used to finance an investment property. Other programs, VA, FHA and USDA loans are only available to purchase an owner occupied home while a conventional loan can be used to finance the purchase of a primary residence or a rental property.
Borrowers are also allowed to pull equity out of the home in the form of cash when refinancing, referred to as a “cash out” refinance. Most lenders allow for a cash out refinance up to 80 percent of the value of the property, although exceeding 75 percent will typically result in slightly higher rates.
Conventional refinance loans are always “fully documented” meaning the borrowers must qualify in the same manner as during the purchase with pay check stubs, appraisal and income tax returns in addition to other standard requirements.
The FHA refinance also has a streamline program, very similar to the VA program.
No credit score requirement, no appraisal and no income or employment verified. The FHA streamline is available for FHA-to-FHA transactions. In other words, you have an FHA loan currently.
It may also be used to finance a property that was previously occupied by the borrowers, but is now rented out.
The new loan rate and mortgage insurance must drop. The refinance must benefit the borrower.
There can be no payments within the previous three months more than 30 days past the due date.
FHA loans require a monthly and upfront mortgage insurance premium. If the original FHA loan was opened prior to June 1, 2009, the mortgage insurance premiums receive a nice discount.
If you have a VA loan, however, your best option is the VA streamline.
The USDA program is for properties located in rural or semi-rural areas and the borrowers must not exceed specific income guidelines. The USDA refinance is a standard refinance requiring a fully documented loan including an appraisal, credit and income among others.
There is a pilot streamline refinance program available in 35 states and operates in a similar fashion as VA and FHA streamline programs. The USDA streamline is for a 30 year fixed rate only and the rate must be at least one percent lower than the existing one and can only be a USDA-to-USDA transaction. No cash out is allowed.
It really all relates to equity. VA, FHA and USDA loans all have some form of mortgage insurance or funding fees applied, increasing the loan amount as well as the monthly payment. If there is at least a 20 percent equity position in the property refinancing out of one of these three loan types into a conventional one is the better choice.
If there are loan to value issues and there isn’t at least 20 percent equity in the transaction then the applicable streamline should be considered.
There can always be additional lender requirements on top of any issued guidelines called overlays. Some lenders may ask for an appraisal for a streamline for instance. If you’re thinking about refinancing, consider all your options. Not only could you benefit from a lower rate, you might be able to get rid of mortgage insurance premiums as well.
Let’s look at a comparison of the four major loan types for a $250,000 purchase price.
Head to Head – VA Compared to other Loan Types
|APR*||3.721% APR||4.798% APR||5.192% APR||4.246% APR|
|Principle and Interest||$1146||$1102||$1168||$1163|
|Monthly Mortgage Insurance or Fee||$0||$269||$210||$84|
|Estimated Taxes and Insurance||$268||$268||$268||$268|
|Total Monthly Payment||$1414||$1639||$1646||$1515|
Comparison of Qualification Requirements
|Down Payment Percentage||0%||3.5%||5%||0%|
|Approx. Cash Needed**||$0||$8750||$12,500||$0|
|Typical Minimum Credit Score Needed***||620-640||620-640||680||620-640|
|Streamline Refinance Available?||Yes||Yes||No||Yes|
The VA home loan program is a great opportunity for active duty personnel and veterans. Take advantage of your entitlement.
Source for VA loan information: VA Handbook