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Vets: Don't overlook a VA mortgage for your next refinance

By   |  Posted in Refinancing

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 mortgage blogger 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 fee
  • You wanted a Pay Option ARM, interest-only mortgage or other exotic loan
  • Your home's price exceeded the VA limits
  • Your condo was not VA-approved

Today, however, it may be to your advantage to refinance 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 refinance calculator which can give you an idea of what your potential savings will be.

VA loans can be better for those with less equity

"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 the plan.

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:

HARP

VA

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 insurance

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.

About the author:
Gina Pogol has been writing about business, mortgage and finance topics since 1994. In addition to a decade in mortgage lending, she has worked as a bankruptcy paralegal, a business credit systems consultant for Experian and an accountant for Deloitte.

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