Deciphering the VA Lender’s Handbook Chapter 6 Part 1
Chapter 6 of the VA Lender’s Handbook is dedicated to explaining every aspect of refinancing loans. Chapter 6 focuses in on the Interest Rate Reduction Refinancing Loan and Cash-Out refinances as the two main types of refinances. Over the next series of articles, you’ll learn everything you ever wanted to know about Interest Rate Reduction Refinancing Loans (IRRRLs). By the time we get to cash-out refinances, you’ll be an IRRRL guru. This first article is going to cover some of the basic aspects of an IRRRL – what it is, what it’s for, and what requirements there are for an IRRRL to occur.
First, what is an IRRRL? An IRRRL is the VA’s streamline refinance option; a loan that is made to pay off an existing loan and replace it with the terms of the new loan. A streamline refinance is one that uses much of the underwriting information from the previous loan rather than having to go through the entire process all over again – hence the term ‘streamline’. The Handbook also offers the following definition of an IRRRL: “An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan.”
The quote above hits on one of the requirements that the VA has for an IRRRL: the interest rate must go down. IRRRLs can be fixed-rate, hybrid adjustable-rate mortgage (ARM), or traditional ARM, but regardless, the interest rate must go down with only one exception – if the loan being refinanced is an ARM, the rate will already likely be close to what could be offered on an IRRRL, maybe lower. Barring that one exception (which comes up a lot in the Handbook), the resulting principal and interest payment on the IRRRL must be less than the principal and interest payment on the previous loan. In addition to the exception we already know about (refinancing an ARM), there are two exceptions that can allow for a higher principal and interest payment than the previous loan:
- the term of the IRRRL is shorter than the remaining term on the loan being refinanced
- energy efficiency improvements are included in the IRRRL
With either (or multiple) of the above exceptions, the veteran’s monthly payment may not only increase – it may increase substantially, especially if one or more exceptional case is combined with the veteran financing their closing costs, financing up to two discount points, financing the funding fee, or a higher interest rate when an ARM is being refinanced. Seeing as how the borrower could easily add $10,000 and more to his or her principal in this case, and elect to have a shorter loan term, and get a higher interest rate if they’re refinancing from an ARM, it makes a great deal of sense to have an exception.
Part of what makes a streamline refinance possible is the ability to use the same underwriting information from the previous loan. However, this is not a possibility if the borrower’s monthly payment increases dramatically, because even if the borrower qualified for the previous monthly payment, there’s no guarantee that he or she will qualify for the new amount. Therefore, if the monthly payment increases by 20% or more, the lender is responsible for determining from an underwriting standpoint whether the borrower is qualified for the new loan amount and monthly payment. The lender will also have to provide a certification to the VA in these cases that states that the borrower is qualified for the new monthly payment that exceeds the previous payment by 20% or more.
The next article will start out by covering the required Veteran’s Statement and Lender’s Certification and going into detail about what those require, as well as talking about what closing costs can be included in the loan amount and what costs cannot. The ability to roll closing costs into the loan is one of the great advantages to the IRRRL. If you have case-specific questions that you aren’t sure about, it’s always best to talk to your lender directly.