The VA home loan is a very important military benefit, and it’s unique among those benefits for a variety of reasons. The main one is that it is one of the few benefits you get from joining United States military that gives you access to the program but does not necessarily guarantee approval, due to the requirement that all VA home loan applicants must financially qualify to get the loan itself approved.
But VA home loans have flexible credit guidelines and a very borrower-friendly set of down payment requirements (zero down in most cases unless there are credit problems or other circumstances which may require a down payment).
And there is an advantage to having a VA mortgage that goes beyond the no-money-down home loan option and flexible credit guidelines. If you have an existing VA mortgage, you are eligible to apply for a refinance loan that requires a benefit to the borrower in the form of a lower interest rate, lower monthly payment, the ability to get out of an adjustable rate mortgage into a fixed-rate loan, etc.
This option is known as the VA Interest Rate Reduction Refinance Loan, or VA IRRRL for short. It’s also known as a VA Streamline Refinance mortgage and has helped many borrowers pay less on their home loans.
The VA Interest Rate Reduction Refinance Loan: Basic Rules
The VA IRRRL is only approved for a home you have purchased with a VA mortgage. These refi loans are known as VA-to-VA refinance loans. These loans must result in a tangible benefit to the borrower in a specific form. That can be lower monthly payments, a lower interest rate, getting into a fixed-rate mortgage from an adjustable rate loan, etc.
There are circumstances where certain adjustments to the loan (in the form of add-ons such as financed closing costs) may result in the monthly payment actually going higher. VA loan rules anticipate this and such instances are handled on a case-by-case basis.
When you use your VA mortgage benefits the first time, you use a portion or all of your VA home loan entitlement. Borrowers normally get this entitlement restored when the loan is paid in full whether that is by paying off the mortgage loan in its entirety or refinancing the mortgage loan.
However, with a VA IRRRL, your ORIGINAL ENTITLEMENT is used to approve the new refi loan on your real estate, and you do NOT need to apply to have the entitlement restored the way other refinance loans in the VA loan program do.
VA Certificate of Eligibility Rules For IRRRLs
A VA loan Certificate of Eligibility (COE) is not required but if you have yours, include it in your home loan application to show the lender your prior use of the original VA home loan entitlement.
The Department of Veterans Affairs official site reminds lenders that “No loan other than the existing VA loan may be paid from the proceeds of an IRRRL.” That means that home owners with a second mortgage must request that the lender of that second mortgage allow that mortgage to be a subordinate lien so that the VA IRRRL is the first mortgage.
VA mortgage loans and refinance loans usually require the borrower to certify that they are using the home as their primary residence. With a VA IRRRL this requirement is different-you only need to certify that the home was the primary residence when you were paying on the original note.
VA IRRRL Loan Limits
The Department of Veterans Affairs does not cap how much you are permitted to borrow with a VA refinance loan, but there are limits “on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you,” according to the VA.
Effective January 1, 2020, the Department of Veterans Affairs removed VA loan limits, meaning there are no more VA-imposed caps on mortgage loans established by county. VA lenders will enforce their own limits and borrowers must still qualify with income, credit, and employment data. But the days of the VA establishing mortgage loan guaranty limits by county are over.
VA IRRRL Loan Terms
Your VA IRRRL may offer you the chance to move from a 30-year mortgage to a 15-year loan with a corresponding difference in interest rates. While the rate you are offered on a 15-year mortgage may be lower than a 30-year loan, the rise in monthly mortgage payments could be more than you can afford. It is very important to run the numbers and study the results before you commit to switching from a 30-year loan to a 15-year mortgage. Don’t assume your payments will still be as low as they are now when cutting the loan term in half.
VA IRRRLs: Things To Remember
The VA loan rules for Interest Rate Reduction Refinance Loans require no appraisal or credit check except under specific circumstances such as the amount of the loan being increased beyond a certain amount.
The extras in your mortgage loan may include certain approved closing costs, and certain add-ons such as the VA Energy Efficient Mortgage add-on for approved energy saving upgrades to the home. If the amount of your mortgage goes up too much with such add-ons, the lender will be required to do a credit check.
It is also crucial to remember that your lender may require an appraisal or credit check regardless depending on lender requirements, state law, and/or other variables.
VA IRRRLs may be permitted as no-cost loans, which means no money is paid by the borrower up front. All costs would be rolled into the mortgage and the lender may charge a different interest rate to offset some costs.
The VA official site reminds borrowers that when refinancing from an adjustable rate mortgage into a fixed rate loan, the interest rate may be higher on the new loan – this is permitted. The interest rate becoming fixed is viewed by the VA as the tangible benefit in such cases.
Remember, participating VA lenders are not required to issue VA IRRRLs, but any participating lender can process your IRRRL and you do NOT need to keep the same lender in order to apply for this Interest Rate Reduction Refinance Loan.
What You Need To Know About VA IRRRLs And Cash Back At Closing Time
Borrowers sometimes want to know if they can apply for more loan than is required so that they can take cash back at closing time. Their idea is that by applying for more home loan or refinance loan than is required to pay off the note, closing costs, and other approved expenses, the excess could come to them in cash at closing.
This is NOT POSSIBLE with a VA IRRRL-you may not receive cash at closing time with this kind of mortgage in the manner mentioned above. Borrowers who want a VA refinance with cash back at closing need to apply for a VA Cash-Out Refinance loan.
VA IRRRLs and the VA Home Loan Funding Fee
Veterans applying for any VA home loan will pay a funding fee unless they are exempt from paying. VA loan funding fees are lower for first-time borrowers, and all borrowers have the option to pay the funding fee in full at closing time or have the entire funding fee rolled into the loan. Your funding fee is lower if you make a down payment depending on the amount of that money down.
Who is exempt from paying VA loan funding fees? According to the VA official site, the following people are exempt, but must show supporting documentation to claim the exemption:
- Veterans receiving VA compensation for a service-connected disability, OR
- Veterans who would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active duty pay, OR
- Surviving spouses of veterans who died in service or from a service-connected disability.
- As of January 1, 2020, active duty military who have been awarded the Purple Heart may also qualify for an exemption for the VA loan funding fee.
Veterans who have medical claims that are still being evaluated by the Department of Veterans Affairs at the time the VA IRRRL is processed by the lender may not have the final word from the VA about their status as a VA-recognized disabled veteran.
That means the borrower has no VA documentation to show the lender that she is exempt from paying the VA loan funding fee, and in such cases you are normally required to pay the fee and request a refund later on when you do have VA documentation to show that you are exempt from paying the fee because you receive or are eligible to receive VA compensation for service-connected medical conditions.
Borrowers should know that these refunds are NOT automatic, must be applied for, and supporting documentation will be required. The procedures for surviving spouses claiming their exemptions from the VA funding fee may be more complex so it pays to build in more time in the home loan planning and application process just in case.
As of January 1, 2020, the VA loan funding fee is based on the following for those who are not exempt:
- First-time use with no money down – 2.3%
- 5 percent down – 1.65%
- 10 percent down – 1.4%
Second-time use VA loan funding fees are as follows:
- First-time use with no money down – 3.6%
- 5 percent down – 1.65%
- 10 percent down – 1.4%
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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