VA Streamline and Cash-Out Refinances: Perfect HARP Alternatives
Since the introduction of the Home Affordable Refinance Program, or HARP in 2009, Congress has tried to address the negative equity many home owners have. HARP and later HARP 2.0 has special provisions allowing a borrower who is “upside down” with their property to refinance their current interest rate to the lower ones now available. To date, more than 3 million have taken advantage of this program.
Yet while the HARP program helped even more borrowers couldn’t take advantage of the HARP program because their loans were owned by Fannie Mae or Freddie Mac, a key requirement. But there is another alternative allowing for a refinance with no equity at all and the loan doesn’t have to be owned by Fannie or Freddie.
That alternative is a VA refinance.
VA Streamline Refinance
VA loans also have an inherent advantage as it relates to refinancing an existing VA mortgage. The Interest Rate Reduction Refinance Loan, or IRRRL is most commonly referred to by lenders as the VA streamline. So-called because it requires very little documentation from the borrower.
The VA streamline must be a VA to VA loan, meaning the current loan must be a VA mortgage. Yet with a streamline, there is no income documentation required. During the original VA approval, eligible borrowers had to provide paycheck stubs, W2 forms, and income tax returns if the borrower was self-employed. In addition, the borrower must have provided bank statements proving there were sufficient funds for closing costs and associated fees. A streamline requires no evidence of cash in the bank.
And finally, there is no appraisal requirement. No proof of income, no assets, and no appraisal make for a simple process. And because there is no appraisal requirement there is no need to establish value. The home’s value may be less than what is owed but a streamline ignores that.
The lender will make sure you are current on your mortgage, but credit requirements are much more lenient than other refinance types. As long as the borrower is reducing the mortgage rate or is refinancing from an adjustable-rate mortgage to a fixed one, the VA streamline option is an ideal choice.
VA Cash Out Refinance
But what if the current loan isn’t a VA mortgage? If the borrower has VA eligibility, it’s perfectly fine to refinance from a non-VA mortgage to a VA loan using a VA cash-out loan.
And that can help those who have little or no equity refinance into a lower rate. With this program, someone may have a $200,000 loan on a $200,000 house. If the loan isn’t HARP-eligible the VA cash-out refinance may be a workable option. This method requires full documentation such as paycheck stubs, appraisals, and the like but it can work when applied correctly.
Compared to conventional mortgages, the VA cash-out loan allows borrowers to take more cash out of their homes. When pulling cash out during a refinance, conventional loans restrict the amount borrowed to be no greater than 80 percent of the current value of the home. That means if a property is appraised at $200,000, the cash-out loan may not exceed 80 percent of that amount, or $160,000.
Yet the VA loan allows for cash to be pulled out during a refinance of up to 100 percent of the value of the property. There are caveats however as individual lenders may have their own internal guidelines lowering the maximum.
A common loan limit is 90 or 95 percent of the current value – still much higher than conventional cash-out loans.
The VA cash-out mortgage requires an appraisal and full documentation as far as income and assets, unlike the streamline option. If you’re considering a VA cash-out loan, discuss all your options with an experienced VA loan officer who can run the numbers for you to see if it makes sense for your specific situation.
See if a VA cash-out refinance is right for you. Speak to a knowledgeable VA loan officer here.
Who can use a VA loan?
It might surprise you to learn that the VA mortgage program isn’t relegated to veterans of the armed forces. Created as part of the original G.I. Bill in 1944, this special mortgage program provided competitive mortgage options for those returning from World War II and required no money down. Later, the program was expanded to others who have the VA home loan benefit available to them.
Besides veterans of the Armed Forces, active-duty personnel may also be eligible with at least 181 days of service. Those that have served for six years in either the National Guard or Armed Forces Reserves can qualify for the loan. Even surviving spouses of veterans who have died as a result of service-related injuries can take advantage of the benefit.
Check your eligibility for either a VA streamline refinance or cash-out refinance with one of our VA loan experts.