There are basically two types of VA refinance loans. One is a Cash Out Refinance and the other is an Interest Rate Reduction Refinance (IRRRL). The IRRRL is sometimes just referred to as a rate term refinance. There are some minor differences with a VA mortgage based on the individual’s situation.
Please keep in mind that many lenders have stopped doing IRRRLs. I’m sure it is because of the disparity in home value related to the real estate market today (2009). You may have to shop around to find a lender and then you must hope that you have enough equity in your home to make it worth while.
Rate and Term Refinance/IRRRL
The purpose is to refinance an existing VA-guaranteed or direct loan for the purpose of a lowerinterest rate or to refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home.
While the underwriting standards detailed apply to cash-out refinances, IRRRL’s generally do not require any underwriting. Interest Rate Reduction Refi Loans (Streamline Refinancing Loans) generally require no appraisal, credit information or underwriting , and any lender may close an IRRRL automatically. Refer to investor for any investors additional requirements.
IRRRL’s made to refinance VA loans that are 30 days or more past due must be submitted to VA for prior approval. It must be reasonable to conclude that:
- The circumstances that caused the delinquency have been corrected, and
- The veteran can successfully maintain the new loan.
Note: Exceptions and specific requirements are explained below.
Interest Rate Decrease Requirements
An IRRRL (which can be a fixed rate or hybrid ARM) must bear a lower interest rate than the loan it is refinancing unless the loan it is refinancing is anAdjustable Rate Mortgage (ARM).
Payment Decrease/Increase Requirements
The principal and interest payment on an IRRRL must be less than the principal and interest payment on the loan being refinanced unless one of the following exceptions applies:
- The IRRRL is refinancing an ARM.
- Term of the IRRRL is shorter than the term of the loan being refinanced, or
- Energy efficiency improvements are included the IRRRL.
A significant increase in the veteran’s monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:
- Financing of closing costs.
- Financing of up to 2 discounts points.
- Financing of the funding fee, and/or
- Higher interest rate when an ARM is being refinanced.
If the monthly payment (PITI) increases by 20 percent or more, the lender must 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, …and include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.
Veteran’s Statement and Lender’s Certification
For all Interest Rate Reduction Refinance Loans the veteran must sign a statement acknowledging the effect of the refinancing loan on the veteran’s loan payments and interest rate.
The statement must show the interest rate and monthly payments for the new loan versus that for the old loan. The statement must also indicate how long it would take to recoup ALL closing costs (both those included in the loan and those paid outside of closing).
If the monthly payment (PITI) increases by 20 percent or more, the lender must include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.
Vet’s monthly payment decreases by $50.00: Vet pays $5,000 in closing costs (includes all costs – closing costs, funding fee, discounts, etc.) … Recoup closing costs in 100 months -$5,000 divided by $50.
Note: this would not be required in those limited cases where the payment is not decreasing (reduced term of loan, etc).
The veteran’s statement may be combined with the lender’s certification.
Closing Costs that can be included in the loan
The following fees and charges may be included in an IRRRL: the VA funding fee, and any allowable fees and charges discussed in “Fees and Charges the Veteran-Borrower Can Pay”; such as, all allowable closing costs, including the lender’s flat charge.
Closing Cost Limitation
While the borrower may pay any reasonable amount of discount points in cash, only up to two discounts can be included in the loan amount. Although VA does not require an appraisal or credit underwriting on IRRRLs, any customary and reasonable credit report or appraisal expense incurred by a lender to satisfy its lending requirements may be charged to the borrower and included in the loan.
The lender may also set the interest rate on the new loan high enough to enable the lender to pay all closing costs, as long as the requirements for lower interest rate and payments (or one of the exceptions to those requirements) are met.
For IRRRLs to refinance loans 30 days or more past due (which must be submitted for prior approval), the following can be included in the new loan:
- Late payments and late charges on the old loan, and
- Reasonable costs if legal action to terminated the old loan has commenced.
Cash Out Limitations
An IRRRL cannot be used to take equity out of the property or pay off debts, other than the VA loan being refinanced. Loan proceeds may only be applied to paying off the existing VA loan and to the cost of obtaining or closing the IRRRL.
Therefore, the general rule is that the borrower cannot receive cash proceeds from the loan. (if necessary, the refinancing loan amount must be rounded down to avoid payments of cash to the veteran).
The one exception is 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.
Note: Use of loan proceeds for energy efficiency improvements not involving cash reimbursements of the veteran is also an option.
In addition, there are situations which come about at closing which may result in the borrower receiving cash. Some examples of situations for which VA does not object to the borrower receiving cash are:
- Computational errors.
- Changes in final pay-off figures.
- Up-front fees paid for the appraisal and/or credit report that are later added into the loan, and
- Refund of the escrow balance on the old loan. This often occurs when a party other than the present holder originates the loan.
While VA’s policy is not to set a “ceiling” or a specific dollar limitation on cash refunds resulting from adjustments at closing, if a situation involves a borrower receiving more than $500, consult VA as to its acceptability.
Lenders and VA personnel should exercise common sense when assessing such situations and draw from basic program information to know the difference between an equity withdrawal and cash from unforeseen circumstances.
Maximum Loan Amount
Always use VA Form 26-8923, IRRRL Worksheet, to calculate the maximum loan amount. Basically it is:
- The existing VA loan balance: Including any late payments* and late charges, plus
- Allowable fees and charges (includes up to 2 discount points), plus
- The cost of any energy efficiency improvements, plus
- The VA funding fee.
* There should be no cases in such an IRRRL closed on the automatic basis includes delinquent payments in the loan amount. All such loans must be submitted for prior approval.
Note: There is no maximum dollar amount for VA loans. Since an IRRRL rolls the above items into the new loan, and VA guarantees at least 25% of the loan amount (without regard to the veteran’s entitlement), the new loan amount may be more than the limits established by the secondary market. It is the lender’s responsibility to ensure it has a marketable loan.
Amount of Guaranty and Entitlement Use
No additional charge is made to the veteran’s entitlement for an IRRRL; such as, the amount of the veteran’s previously used and available entitlement remains the same before and after obtaining the IRRRL.
The new IRRRL loan amount may be equal to, greater than, or less than, the original amount of the loan being refinanced. This may impact the amount of guaranty on the new loan, but not the veteran’s use of entitlement.
How To Calculate The Amount Of Guaranty On An IRRRL
IRRRLs up to $45,000:
First, calculate the lesser of : 50% of the IRRRL loan amount, or the amount of guaranty used on the VA loan being refinanced.
The amount of guaranty is the greater of: the above result, or 25% of the IRRRL loan amount.
IRRRLs of $45,000 to $56,250:
First, calculate the lesser of: $22,500, or the amount of guaranty used on the VA loan being refinanced.
The amount of guaranty is the greater of: the above result, or 25 percent of the IRRRL loan amount.
IRRRLs of $56,251 to $144,000
First, calculate the lesser of: 40 percent of the IRRRL loan amount, or the amount of guaranty used on the VA loan being refinanced.
The amount of guaranty is the greater of: the above result, or 25 percent of the IRRRL loan amount.
IRRRLs greater than $144,000
Guaranty on these is always 25 percent of the IRRRL loan amount.
Maximum Loan Term
The maximum loan term is the original term of the VA loan being refinanced plus 10 years, but not to exceed 30 years and 32 days. For example, if the old was made with a 15-year term, the term of the new loan cannot exceed 25 years.
- The IRRRL must replace the existing VA loan as the first lien on the same property.
- Any second lien-holder would have to agree to subordinate.
- The borrower cannot pay off liens other than the existing VA loan from the IRRRL proceeds.
- The veteran (or surviving co-obligator spouse) must still own the property.
Borrowers eligible for IRRRL’s … generally the party(ies) obligated on the original loan must be the same on the new loan (and the veteran must still own the property).
- A divorced spouse is keeping the home and wishes to refinance. The spouse cannot get an IRRRL unless the veteran agrees to be obligated on the new loan and commit his or her entitlement to the new loan. ( a person without entitlement cannot get an IRRRL or any other type of VA loan.)
- Applicants cannot obtain an IRRRL if they do not include the veteran or a person who was the veteran’s spouse at the time the original loan was made (and who was obligated on the loan along with the veteran)
- In the case of an unmarried veteran obtaining the original loan if the marriage and death of the veteran occurred after the loan was made, and the deceased veteran’s spouse is not obligated on the original loan an IRRRL is not possible.
- In the case of a veteran and spouse obligated on the original loan where the divorce, remarriage, then death of the veteran occurred after the loan was made, the deceased veteran’s new spouse is not obligated on the original loan thus an IRRRL is not possible.
- In the case of a veteran/non-veteran joint loan and the veteran “sold out” to the non-veteran co-obligor after the loan was made and the veteran no longer has any ownership interest in the property, an IRRRL is not possible.
The lender should contact VA regarding a proposed IRRRL involving a change in obligors unless the acceptability of the IRRRL is clear.
Underwriting of IRRRL’s When Obligors Have Changed
Although VA does not require any credit/income documentation or re-underwriting of IRRRLs when there has been a change in obligors, lenders may want to consider the following:
- Check mortgage payment record in lieu of obtaining a full credit report, unless required by investor.
- For death or divorce cases, obtain a statement from the obligor(s) on the ability to make payments on the new loan without the co-obligor’s income.
- Obtain a statement about the addition of a different spouse, change in number of dependents.
- The lender should satisfy itself that the lower payment and interest rate and the minimum 25 percent guaranty compensate for no re-underwriting on the new loan when there has been a change in obligors.
Prior Approval Submission
Any IRRRL made to refinance a loan that will be 30 days or more past due as of the date of closing, must be submitted for prior approval. The lender must first obtain sufficient information and perform sufficient analysis to determine that the:
- Cause of the delinquency has been resolved, and
- Veteran is willing and able to make the proposed loan payments.
- All late payments and late charges (and reasonable cost if legal action to terminate the old loans has commenced) can be rolled into the new loan.
If the amount of late payments, late charges and legal costs is significant, the proposed monthly payment will be adversely impacted. Carefully analyze whether the IRRRL would benefit the veteran and not create unacceptable risk to the Government in light of the new monthly payment.