VA home loan refinance options include a unique benefit known as the VA Streamline Refinance. This type of refi loan has no VA-required credit check or appraisal (the lender is free to require these depending on circumstances) and is intended to provide a benefit to the borrower in the form of a lower interest rate, a lower mortgage payment, or other benefits we’ll discuss below.
Refinancing with a VA mortgage can lead to lower interest rates, get you out of an adjustable rate mortgage into a fixed-rate loan, and help you to add more stability and predictability to you monthly mortgage payment.
You can use a VA Streamline refinance on any current VA mortgage, and you may be permitted to refinance a delinquent VA mortgage loan using a VA IRRRL.
There may be limits on what you can do to refinance a delinquent VA mortgage depending on the age and severity of the delinquency.
It is best to speak to a participating VA lender to learn what your options are in this area if you are behind on VA mortgage payments. Act sooner instead of later for best results and the most flexible options.
VA Refinance Loans In General
Those who borrow money to buy a home using the VA Loan benefit have the option to use the VA loan program to refinance their mortgages at a later date.
These refi loans can include cash-out refinancing (which requires a new appraisal and credit check and has an occupancy requirement), but also VA Streamline Refinance options which have no VA-required credit check or appraisal in most cases.
VA cash-out refi loans can actually be used to refinance VA or non-VA mortgages but the VA Interest Rate Reduction Refinance Loan (VA IRRRL or VA Streamline Refinance) can only be used on existing VA mortgage loans.
The VA Streamline Refinance Option: The Interest Rate Reduction Refinance Loan
VA Streamline Refinance loans are also known as VA Interest Rate Reduction Refinance Loans or VA IRRRLs for short. This loan is the same no matter which name is used.
The VA IRRRL has the following requirements: the borrower must have an existing VA mortgage and the new loan must refinance that existing VA loan. The borrower must be able to certify in writing that the home was being used as the primary residence before the loan application and/or is being used as such at the time of the loan application.
VA Streamline Refinancing And Second Mortgages
VA home loan rules state that the mortgage holder for any second mortgage must agree to make the VA refinance loan the “first mortgage.”
Applying For A VA Streamline Refinance Loan
You do not have to use the original lender for a VA Streamline Refinance Loan, though you may find the process easier to navigate in some ways since your original lender will have all your application data with no need to transfer it to another institution.
That said, you do not have to use the original lender and it often pays to shop around for a new financial institution or at least see what other lenders have to offer at application time. It’s important to shop around aggressively for a new loan since you don’t know what kinds of interest rates or terms are being offered since the last time you tried applying for a major line of credit.
Applying for any refinance loan can take time-you want to know what your lender needs to know about your current finances and credit use.
VA Streamline Refinance Loans are unique because the lender has the option (unless the loan increases monthly payments beyond the VA limit of 20% due to add-ons to the loan) to skip the appraisal and credit check.
This comes as a relief for many loan applicants but remember that Streamline Refinance loans are only for existing versions of the same kind of loan.
VA Streamline Refinances Are For Existing VA Mortgages Only
You can apply for a Streamline Refi loan for your existing VA loan, and those who have FHA mortgages can apply for the FHA version of the Streamline Refi. But you can’t VA Streamline a non-VA loan even if it is an FHA mortgage and vice versa.
VA IRRRLs Must Result In A Benefit For The Borrower
The VA loan rules for Streamline Refinances or VA IRRRLs state clearly that a lower mortgage payment or interest rate are two of the kinds of benefits a VA IRRRL requires in most cases. Other benefits to the borrower can include but may not be limited to:
- Leaving an adjustable rate mortgage for a fixed rate loan
- Shortening the loan term
- Refinancing a delinquent loan
VA Advice On Closing Costs
Certain closing costs financed into the mortgage can raise the monthly mortgage payment more than you might expect. VA loan rules for financed closing costs includes the following advice from HUD 4000.1:
“A significant increase in the veteran’s monthly payment may occur with any of these three exceptions,” especially when, the VA Lender’s Handbook says, combined with the financing of closing costs, financing of two discount points, or financing of the funding fee. Borrowers may also experience a higher payment if an adjustable rate mortgage is refinanced with a VA IRRRL.
Add-Ons To The Loan Can Increase Your Monthly Payments
Sometimes a VA Streamline Refinance loan does not result in a lower mortgage payment. This is often due to add-ons to the loan (see above) in the form of financed closing costs or other expenses.
VA loan rules include provisions for this; if your monthly payment goes higher by 20% or more, the lender is required to take steps that may include a new credit check. The lender, according to the VA Lender’s Handbook, must in such cases:
“…determine that the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable.”
The lender is also required to make sure the borrower is financially qualified to accept the increased monthly mortgage payment when it is raised by 20% or better.
Avoiding A Certain Type of Home Loan Add-On By Paying In Cash
Some VA borrowers choose to pay discount points on their mortgage loan or refinance loan to get into a lower rate. With VA IRRRLs you may do this by paying for any “reasonable” amount of discount points in cash.
VA borrowers applying for VA Streamline Refinance Loans are restricted to financing such discount points-only two points can be rolled into the loan amount.
What You Cannot Do With A VA Streamline Refinance Loan
A VA Streamline or VA IRRRL cannot result in cash back to the borrower except under specific circumstances the VA has defined in Section 6-5 of VA Pamphlet 26-7 which states that there are a very limited number of circumstances where a borrower is permitted to get cash back on a VA Streamline Refinance transaction. They are usually for items pre-paid but that require a refund later due to errors, changes in the amount of the final payoff, and any up-front fees that were later rolled into the loan amount such as:
- Credit reports
- Escrow refunds
VA Streamline Refinance loans cannot be used to take equity out of the property in cash, they cannot be used to pay off debts (except for the previous mortgage being paid off by the new loan) and the VA Lender’s Handbook specifically states that the “…general rule is that the borrower cannot receive cash proceeds from the loan.”
The VA goes so far to say that if required, the loan amount itself “must be rounded down to avoid payments of cash to the veteran” where required.
One Exception To The No-Cash-Back Rule
There is only a single, non-refund-based exception to VA home loan rules for cash back to the borrower on a VA Streamline transaction. That exception? “Reimbursement of the veteran for the cost of energy efficiency improvements up to $6,000 completed within the 90 days immediately preceding the date of loan closing.”
Ask your loan officer if you are interested in such energy-efficient improvements; you may be directed to apply for a VA loan option known as the Energy Efficient Mortgage which can be added onto the loan amount for both new purchases and refinance loans.
The caveat here (aside from the usual warnings about how such add-ons can increase the monthly cost of your home loan) is that you may ONLY use the funds disbursed for the approved projects you discuss with your lender.
VA IRRRL Interest Rates
A lower interest rate is one of the tangible benefits for VA Streamline Refinance / VA IRRRLs. But not all VA Streamlines will provide a lower interest rate. Some borrowers are refinancing into fixed-rate loans and out of adjustable rate mortgages or ARM loans.
Depending on where the borrower is with the ARM loan, the interest rate offered on the VA Streamline may be higher, but the rate can be locked so that there are no future changes to the interest rate to worry about.
That is one reason why the VA Streamline is attractive to those with ARM loans-the predictability of future mortgage loan payments is a definite benefit.
Other Things You Should Know About The VA Interest Rate Reduction Refinance Loan
In general, the VA Lender’s Handbook spells out some fees and expenses that may be charged to the veteran by a participating VA lender for issuing a VA IRRRL or VA Streamline Refinance loan.
These fees can include the lender’s flat fee, the VA loan funding fee, discount points, and closing costs. The VA Lender’s Handbook also mentions that, “The lender may also set the interest rate on the new loan high enough to enable the lender to pay all closing costs.” This is allowed only if lower rates and lower monthly payment requirements are met.
Refinancing A Delinquent VA Mortgage
VA loan rules allow for a VA IRRRL to pay off and refinance a delinquent VA mortgage loan. The VA Lender’s Handbook includes rules for these types of transactions too, stating that in order to refinance a VA mortgage 30 days or more past due, the loan must first be submitted for approval.
Once that is accomplished, the loan to refinance a delinquent VA mortgage may also include late payments, late fees, and/or other approved costs from the old loan. The loan can include “reasonable costs if legal action to terminate the old loan has commenced.”
Not all participating lenders offer all VA home loan products. You will need to shop around for a lender who can help you with the specific type of home loan you need; in this case it is a VA-to-VA refinance loan also known as a VA Streamline or VA Interest Rate Reduction Refinance Loan.
Finding a participating lender isn’t the most challenging part; shopping around for the right lender who can offer you more competitive rates and terms can be the real issue so be sure to give yourself plenty of time to find the best participating VA lender for you.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
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