VA IRRRL Vs Cash Out Refinance in Texas

Backed by the Department of Veterans Affairs (VA), a VA Interest Rate Reduction Refinance Loan (IRRRL) lets you refinance your current VA loan into a new mortgage with a lower or more stable fixed rate.

A VA cash-out refinance, which allows homeowners to refinance into a new VA loan and receive cash from their equity, is not allowed in Texas.

Read on to understand when a VA IRRRL makes sense for your situation and why a VA cash-out refinance isn’t an option in the Lone Star State. I’ll also provide alternatives for refinancing or accessing home equity.

Comparing VA IRRRL Vs Cash Out Refinance in Texas: Benefits and Requirements

Also known as a “streamline” refinance, a VA IRRRL requires less paperwork and moves faster than a standard refinance.

In most cases, it involves minimal documentation since many lenders don’t require income verification or a home appraisal.

Plus, you can roll closing costs into the new loan to reduce your upfront payment.

VA IRRRL Benefits

A VA IRRRL may be a good fit if you aim to lower your monthly mortgage payment by refinancing to a lower rate.

It’s also a smart option if you want more stable payments by refinancing your adjustable-rate mortgage to a fixed-rate loan.

However, keep in mind that you cannot tap into your home equity with this loan program.

Key Takeaway: Consider a VA IRRRL if you want lower monthly payments, better loan terms, and a faster, simpler refinance process without taking cash from your home equity.

VA IRRRL Eligibility Requirements

VA loans are available to eligible active-duty service members, veterans, and surviving spouses in the U.S. Here are the requirements for a VA IRRRL:

• Existing VA Loan: You have an existing VA-backed home loan.
• Loan Purpose: You’re refinancing your current VA-backed home loan using the IRRRL.
• Occupancy: You must certify that you currently occupy the home or previously lived there. The home covered by the loan doesn’t have to be your primary residence. For example, if you’re stationed elsewhere and want to keep your first home, you may refinance it even after moving out.
• Rate Benefit: Your new loan must have a lower interest rate than your current loan, unless you’re moving from an adjustable or variable rate to a fixed one.
• Second Mortgage: If the home has a second mortgage, the holder must allow the new VA-backed loan to become the primary mortgage.
• Credit Score: While the VA doesn’t set a minimum score, most lenders look for a credit score of at least 620.

A VA IRRRL has a VA funding fee that’s 0.5% of the loan amount. Some borrowers may be exempt, such as those with qualifying service-connected disability benefits.

Pro Tip: Improve your approval chances by making consistent on-time mortgage payments, reducing monthly debt obligations, and avoiding new credit activity during underwriting. Also, it’s best to keep clear income records and build cash reserves when possible.

Why VA Cash Out Refinance Isn’t Available in Texas

A VA cash-out refinance is a common option for homeowners who want to pull cash out of their home equity to finance substantial expenses, such as home improvements, education costs, or debt consolidation.

However, you cannot do a VA cash-out refinance in Texas because state home equity rules do not allow the VA guaranty to secure a cash-out loan.

Texas homestead law protects homeowners from draining too much equity and shields their property from certain creditor claims.

VA IRRRL and VA Cash Out Refinance Alternatives

Consider these alternative financing options if you want to change your loan terms, finance home improvements, or tap into your home equity for other expenses:

• Conventional Refinance: Ideal for borrowers with a strong financial profile, stable income, and enough home equity to remove private mortgage insurance (PMI). It follows Fannie Mae and Freddie Mac guidelines, so it requires more documentation compared to VA IRRRL.

• VA Renovation Refinance: Replaces your current VA loan with a new VA-backed loan that covers eligible home renovation costs. You don’t have to pay PMI or make a down payment, but the funds are strictly for approved home improvements or repairs.
• VA Supplemental Loan: A smaller VA-backed loan for financing approved renovations or repairs on a property with an existing VA loan.
• Texas Section 50(a)(6) Cash-Out Refinance: Replaces your current mortgage with a larger non-VA loan, allowing you to take cash from your home equity. Under Texas home equity rules, your total loan amount cannot be higher than 80% of the home’s value.
• Home Equity Line of Credit (HELOC): A revolving credit line secured by your home equity. Repaying your balance replenishes your available credit, which means you can borrow against your home equity repeatedly throughout the draw period, which is often around 10 years.
• Closed-End Home Equity Loan: A fixed-rate second mortgage that lets you borrow a lump sum against your home equity without replacing your current first mortgage.

Know Your Options and Find a Trusted Lender

Whether you want to lower your monthly payment to save money, change your loan terms, or access your home equity, be sure to review your options carefully and run the numbers. 

Need help comparing refinance options for your financial situation? Our experienced loan officers at Texas United Mortgage have helped many borrowers with varying financial goals.

Contact us now for personalized assistance. We’ll review your circumstances, answer your questions, and expertly guide you through the application process.

Next, find out how long it takes to get a VA loan approval in Texas to prepare ahead.