Surely the ideal loan program for those looking to come to their closing with as little cash as possible is the VA loan. There are only a couple of government-backed mortgages that do not require a down payment and the VA program is one of them. The other is the USDA mortgage but that is reserved for areas considered “rural.” As a plus, the borrower is restricted from paying certain types of closing costs which further reduces the amount of cash to close at the settlement table. Unlike the USDA program, the VA loan has no restrictions as to where the loan can be used. There are restrictions however as to who can take advantage of this program.
As the name implies, veterans of the armed forces are eligible. Active duty personnel can also use the VA program to buy a home as long as the applicant has at least 181 days of active service. Those who have served or are serving in the National Guard or Armed Forces Reserve are eligible with at least six years of service. Finally, unremarried spouses of those who have died while serving or as a result of a service-related injury are eligible.
VA loans have multiple features. Beyond the no down payment requirement, VA loans have some very competitive interest rates. In addition, the loan comes with a guarantee to the lender. Should a VA loan go into default, which is rare, the lender is compensated at 25% of the loss. This compensation comes as a result of a mortgage insurance premium attached to the loan. This insurance policy, referred to as the Funding Fee, is expressed as a percentage of the loan amount. This amount can vary but for first time buyers taking out a 30 year loan with nothing down can expect to pay a 2.15% funding fee. This fee however is not paid for out of pocket but instead rolled into the final loan amount.
When refinancing, there are still more benefits. With a purchase, closing costs associated with the loan must be paid for out of pocket. Either by the buyer, seller, lender credit or a combination of any of these. A VA refinance however does allow the borrower to roll closing costs into the final loan, again keeping cash to close at a minimum.
VA loans can also be refinanced via the Interest Rate Reduction Refinance Loan, or IRRRL. Often referred to as the VA Streamline, very little documentation is needed for an approval. No income or employment verification, reduced credit standards and more advantages. As long as there have been no more than one payment made within the last 12 months more than 30 days past the due date and no such lates within the past six months, the streamline may be used.
There is also another advantage when refinancing- the VA Cash Out Loan. A VA cash out loan is one where the borrower refinances the existing mortgage, rolls in appropriate closing costs plus getting some additional cash sent directly to the borrower’s bank account. How much equity can be taken out in the form of cash? The VA doesn’t set any guidelines for maximum cash out limits, but most lenders do cap a VA cash-out loan at 90% of the value of the property. An appraisal may be needed in such a transaction. And unlike the VA Streamline, the VA cash out program is a fully-documented loan which would include things like paycheck stubs, bank statements or tax returns, for instance.
If you’re thinking about refinancing, let’s have a talk and review your situation. If it does make sense to refinance and the value of your property has grown, you might also want to take out a little extra cash to use however you wish.