The What, Why, and How of the VA Streamline Refinance
The VA loan program, like other loan programs, offers a streamline refinance option for their borrowers. The option the VA offers comes with a great deal of advantages beyond that of other streamline refinance offerings, and has been tailored to best meet the needs of VA-eligible borrowers all over the country. Learning more about the VA streamline refinance can change your future plans for the better, and open up doors you didn’t realize were there. The VA’s streamline refinance option is called the Interest Rate Reduction Refinance Loan, usually abbreviated as the IRRRL. The purpose of this guide is to help you understand what an IRRRL is, why taking advantage of an IRRRL could be one of the best decisions you’ve ever made, and how you get the ball rolling on your IRRRL when you decide it’s time to take the leap.
As mentioned above, IRRRL stands for Interest Rate Reduction Refinance Loan, and is the VA’s offering in the way of streamline refinances.
With a normal refinance, you’re simply getting a new loan under different terms to pay off your existing loan. In practice, the only major difference between a normal refinance and a new purchase loan is that in a normal refinance you already hold the title to the house. Other than things related to that, the process for a normal refinance is virtually the same as for a new purchase. Unfortunately, this means that you need to jump through all of the same hoops as you did when you first bought your home.
A streamline refinance is different; in a streamline refinance, much of the underwriting information is taken from the previous loan, making it far more time-efficient and easy to go through. Because they share underwriting information, a streamline refinance is much more closely-related to the old loan than a normal refinance would be. This sharing of underwriting information, along with the other aspects that make the IRRRL different from other refinance options, ensures that there are a great deal of benefits to utilizing the IRRRL.
The first benefit of using the IRRRL is apparent just from the name – Interest Rate Reduction Refinance Loan. The VA requires that the new interest rate on the IRRRL be lower than the original loan. In fact, the IRRRL came into being because the VA wanted to make it as easy as possible for borrowers to refinance when all they wanted was to take advantage of lower interest rates. The only exception to the requirement for a lower interest rate is if the loan being refinanced is an adjustable-rate mortgage (ARM) or a hybrid adjustable-rate mortgage (hybrid ARM). Additionally, the VA requires that the principal and interest payments on the IRRRL be less than the principal and interest payments on the old loan. This typically, but not always, comes by default when the interest rate is lower. This requirement is also waived if the loan being refinanced is an ARM.
While great in and of itself, the lower interest rate is just the tip of the iceberg; the IRRRL is chock full of other benefits. Because it’s a streamline refinance option, you save a great deal of time and even money throughout the process. If you refinance with an IRRRL, you (usually) don’t have to get your home re-appraised, you don’t have to get an updated Certificate of Eligibility, and your credit and income qualifications are not subject to nearly as much scrutiny as in a normal refinance. If you felt like the process you went through to purchase your home was complicated and perhaps even frustrating, then refinancing with an IRRRL is the way to go. Normal refinances are usually just as complicated as new purchase loans, and can even be more complicated depending on the circumstances.
Oftentimes, limited cash-on-hand provides a barrier to being able to refinance because the expense of closing costs of the new loan are too high. Unfortunately, those borrowers in the most dire straits and in most need of a refinance are also the ones who have the hardest time surmounting that obstacle. The VA IRRRL takes care of this problem by allowing every penny of closing costs to be rolled into the loan amount and paid off month-to-month. Whatever closing costs the borrower cannot or does not wish to pay at closing can be added to the principal amount of the loan and be paid off along with the home. Even better – closing costs can include up to two discount points on the loan, which means you are able to buy a lower interest rate that can save you a great deal of money on the loan.
Additionally, you can pay for more discount points if you’d like, though only two can be rolled into the loan amount. As if the above advantages aren’t enough, the IRRRL also allows the borrower to take up to an additional $6,000 for energy efficiency improvements to their home. This $6,000 can go to reimburse the veteran for improvements already made or pay for planned improvements. Also, using an IRRRL does not make any additional charge to the veteran’s VA loan entitlement amount – in other words, since the IRRRL is replacing the old loan, even if the resulting loan is for a larger amount than the old loan, no more of your entitlement is used.
IRRRLs have an added benefit of looser occupancy requirements. But before you start dreaming of building your real estate empire, check out the details, directly from the VA Lender’s Handbook:
“For IRRRLs, the veteran or the spouse of an active servicemember must certify that he or she previously occupied the property as his or her home. This is different than the requirement for non-IRRRL VA loans that the veteran must intendto personally occupy the property as his or her home.”
So when does this looser requirement come in handy? Most especially when an active servicemember is deployed or has received a PCS and would like to rent out his or her home while they are away. Otherwise, in order to avoid paying for two dwellings (the house bought with a VA loan and whatever living arrangements are made at the new station), the borrower would have to sell their home. This is certainly not the only situation where the loose occupancy requirement provides benefit, but it is probably the most common. Lastly, most IRRRLs can be approved without the lender having to submit the loan application to the VA for prior approval – further reducing the amount of time it takes to close.
So Let’s Recap
We’ve covered most of the benefits of using an IRRRL, but here’s a summary of the points:
- It is usually a requirement that you get a lower interest rate as a result of your IRRRL
- It is usually a requirement that your principal+interest monthly payment is lower as a result of your IRRRL
- You save a great deal of time avoiding much of the underwriting process associated with normal refinances (re-appraisal of the property, obtaining updated COE, etc.)
- You don’t have to spend any money out-of-pocket unless you want to; and up to two discount points can be rolled into the loan
- You can get up to $6,000 for energy-efficiency improvements on your home
- Even if the resulting loan amount is higher than the old loan, no additional charge is made on your VA loan entitlement
- When refinancing with an IRRRL, the borrower need only certify that they previously occupied the home, not necessarily that they currently do.
- Almost any lender can close on most IRRRLs without prior approval from the VA – further speeding up the process for you.
Things to Keep in Mind
With a program as specialized as the IRRRL, there will be situations for which it is not appropriate. IRRRLs do have limitations on when and for what purpose they can be used. For example, other than the $6,000 for energy-efficiency improvements, the borrower is not allowed to receive funds from the loan for anything other than the VA loan being refinanced. In other words, if you are wanting to refinance to pay off credit card debt, consolidate a second mortgage, or for any other reason, you will not be able to use an IRRRL to do so.
IRRRLs have a limit on the maximum loan term they can have. The limit is extremely reasonable, however. The limit on an IRRRL is whatever the term of the original loan was plus 10 years, not to exceed 30 years and 32 days. In other words, a 15-year VA loan cannot be refinanced to anything longer than a 25-year with an IRRRL. Also, if there is a change to be made to the obligors on the loan (due to marriage, divorce, or other event), in many (but not all) cases an IRRRL is not permitted. Be sure to consult with a VA-approved lender if you are looking to add someone to the loan or take someone off and would like to use an IRRRL to do so, if possible.
It may seem odd that the requirement for a lower interest rate and lower monthly payment is waived if the loan being refinanced is an ARM, but it actually makes a lot of sense. ARM loans typically have lower interest rates than fixed-rate loans, and fluctuate along with the market. Therefore, since an ARM loan could easily have a lower interest rate than what you’re using an IRRRL to refinance to, and this is no indication of an unwise decision on the part of the borrower or deceptive actions on the part of the lender, this is an acceptable situation. Using an IRRRL to refinance an ARM is the only exception to the lower interest rate rule, but there are two more cases where the principal+interest monthly payment may be allowed to be higher. These two cases are when the new term of the IRRRL is shorter than the loan being refinanced, and if energy efficiency improvements are included in the loan.
IRRRLs are designed to be simple affairs, and quite frankly the only step that you really need to take is to sit down with your lender and explain you want to apply for an IRRRL. Your lender will walk you through all of the steps required to apply.
If you’d like to be prepared for your meeting with the lender and streamline the process even more, however, there are a number of things you can prepare in advance and pleasantly surprise your loan officer by bringing them with you to the first meeting. The first thing you need to have is your occupancy certification. You can find simple templates online for what is required here, but occupancy certifications can be a simple typed-and-signed letter much like this:
To Whom it May Concern:
I, (insert full name), hereby certify that I previously (or currently, whichever is the case) occupy(-ied) the property at (insert address) from mm/dd/yyyy to mm/dd/yyyy (or ‘present’, whichever is the case).
(Type or Print full name)
(signature and date)
If your lender requires more than that for occupancy certification, he or she will let you know.
If you have a second mortgage on your home, you’ll need to get the second mortgage “subordinated” to the new loan. In other words, the IRRRL needs to have the first lien on your home. If you’re not sure how to get this done, consult with your lender. To be truly prepared for a meeting with your lender, also spend time online researching loan terms and even get on the phone and try to get the terms they will offer you. You may be surprised how much terms can vary lender by lender. If you are willing to take the time, it is also a great idea to sit down with different lenders to get more precise information on the terms they can offer than you could over the phone.
If you’re not sure where to begin, or want help finding VA-approved lenders, contact us at LowVARates via our website.