Do I Have to Get an Appraisal for a VA Refinance?
You might; it depends on what type of refinance you’re getting. This can be a major factor in which type of refinance you choose to use. Even on a conventional loan, the inspection that determines the fair market value of the home can sometimes throw a wrench in the works. If the value comes in too high, the seller may decide to raise the price of the home, and be unwilling to sell it for lower. If the price comes in too low, the seller may not be willing to lower the price of the home and if you still want to buy it, then some of your down payment will have to go towards getting the price down to what the lender is willing to make a loan for. If the seller is willing to lower the sale price, then the only major downside is that the home you’re buying isn’t worth as much as you thought it was.
With the VA loan program, a home must be appraised by an official VA appraiser. The appraisal is very similar to a normal home inspection, but with two specific focuses: determining the fair market value of the home, and making sure that the home is safely inhabitable and suitable for the veteran’s needs. Where a conventional inspection just determines the fair market value and leaves it up to the borrower, a VA appraiser has the power to put the kabosh on the whole thing. Because of this extra level of power that the VA appraiser has, the appraisal process is often a point of stress, frustration, and complication in getting a VA loan. Needless to say, borrowers looking to refinance want to know if this rather onerous step is one that can be skipped. The answer, as mentioned above, depends on what kind of refinance you are getting: an Interest Rate Reduction Refinance Loan (IRRRL), or a cash-out refinance.
The IRRRL is the VA’s streamline refinance option, and as such, it makes speed, ease, and affordability its highest priorities. If you use an IRRRL to refinance your home, then a new appraisal on the property is not necessary. There’s a catch to this, though, and that is that really the only thing an IRRRL can be used to do is get a better interest rate – anything else you want to use a refinance to do will have to be done with a normal refinance. What makes an IRRRL so much faster is that it reuses much of the underwriting information from the original loan, with the assumption that none of that information has changed much. Because it would require a determination of the current value of the property, as well as other underwriting information, an IRRRL cannot used to get cash-out on the equity in the home.
On the flip-side, any other type of VA refinance requires a new appraisal, and totally new underwriting, which is what enables them to offer such options as cash out. Generally speaking, if a VA refinance is not an IRRRL, it is referred to as a cash-out refinance. This is somewhat misleading, however, since the term refers to not only actual cash-out refinances, but cash-in refinances and debt consolidation loans. If you’re getting anything other than an IRRRL, you will be required to get your home appraised again by a VA appraiser. In many cases, this actually works to your advantage – if you’ve added $10k to the value of the home since you bought it, you want that reflected in the amount of equity you have in the home. Why? Because you can only get as much cash out as you have equity in the home. This is also why a new appraisal enables a borrower to get cash out on the refinance – because the current fair market value of the home must be established in order to calculate how much equity the borrower has in the home.
In summary, if you use an IRRRL to refinance your home you will not be required to get it re-appraised, but you also have significantly fewer options with your refinance. If you use a cash-out refinance, you will need to get a new appraisal, but you can do a lot more with your new loan.