VA Loans: Refinancing Loans and VA Loan Eligibility
A borrower who purchases a home using a VA insured loan may want to refinance the loan at some point. When it’s time to explore options, borrowers can choose between VA cash-out refinancing loans and Interest Rate Reduction Refinancing. There are important differences between the two types of loans.
Cash-out VA refinancing loans let the borrower take cash proceeds from the loan for any purpose acceptable under the terms of the loan; VA IRRRLs do not allow any money back to the borrower. Because of these differences in the rules covering cash back to the home owner, there are different rules for applying and qualifying for each type of VA refinancing loan.
When it comes to VA IRRRLs, there is often no credit check or underwriting needed unless the loan falls into specific parameters. Cash-out refinancing does require underwriting, a credit check, etc. But one of the other major differences between cash-out refinancing and interest rate reduction refinancing loans has to do with the use of VA loan entitlement.
For a VA IRRRL, there is no requirement to apply for or use VA loan eligibility. The VA eligibility used in the original loan is what qualifies the borrower to apply for an IRRRL,
The lender is not required to refer to or ask for a VA Certificate of Eligiblity, instead he or she will simply require proof of the original VA home loan. In many cases the borrower may be using the same lender to refinance, so that proof would be on file, but when borrowers approach a new lender, they need to furnish proof of the first VA home loan.
Cash-out refinancing requires the borrower to use entitlement, so the VA loan applicant needs to borrow with any remaining entitlement or apply for VA restoration of entitlement in cases where the refinancing loan will pay off the original note. The VA rules state, “If an existing VA loan on the same property will be paid off by the refinancing loan, the entitlement used for that existing loan can be restored for purposes of obtaining the new loan.”