Deciphering the VA Lender’s Handbook Chapter 6 Part 5
In the previous article, we talked about the rules surrounding the title/liens on the property being refinanced with an IRRRL. We also hit on the maximum loan terms on IRRRLs and went into good depth explaining how a veteran’s entitlement is affected by using an IRRRL to refinance their home loan. In this article, we’ll be talking mostly about two topics: who the VA allows IRRRLs to be made to, and the underwriting considerations a lender has when the obligors on the loan have changed and the borrowers would like to apply for an IRRRL. There is a surprising amount of information about who IRRRLs can be made to and surprisingly little about underwriting considerations when obligors have changed.
So, for the most part, the party or parties obliged on the original VA loan must be the same as the parties obliged on the IRRRL. Typically, the VA-eligible borrower must also still own the property. In explaining the cases a lender might face, the Handbook provides a table showing the different scenarios, with a simple “Yes” or “No” as to whether an IRRRL can be made in this situation. Below is the table:
|Parties Obligated on Old VA Loan||Parties to be Obligated on new IRRRL||Is IRRRL Possible?|
|1||Unmarried veteran||Veteran and new spouse||Yes|
|2||Veteran and spouse||Divorced veteran alone||Yes|
|3||Veteran and spouse||Veteran and different spouse||Yes|
|4||Veteran alone||Different veteran who has substituted entitlement||Yes|
|5||Veteran and spouse||Spouse alone (veteran died)||Yes|
|6||Veteran and non-veteran joint loan obligors||Veteran alone||Yes|
|7||Veteran and spouse||Divorced spouse alone||No|
|8||Unmarried veteran||Spouse alone (veteran died)||No|
|9||Veteran and spouse||Different spouse alone (veteran died)||No|
|10||Veteran and non-veteran joint loan obligors||Non-veteran alone||No|
In explanation of the table, the VA offers the following explanation: “In Case 7, the 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. In Cases 8 through 10, the applicants cannot obtain an IRRRL because 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.”
The Handbook also explains that in cases where both the marriage and death of the veteran happen after the original loan has been made, and no refinance was done to add the spouse to the loan before the death of the veteran, the spouse cannot use an IRRRL to refinance the home. In the event that a veteran divorces, remarries, and dies after making the original loan (an eventful loan term), if the new spouse is not already a co-obligor on the loan, the spouse cannot use an IRRRL to refinance the home. Also, it is not unheard of for a VA-eligible borrower to close on a loan with a non-spouse, non-VA eligible co-borrower. In the case where the non-VA eligible co-borrower is wanting to refinance the home by him or herself, an IRRRL cannot be used since there is no entitlement available for the VA to guarantee the loan.
In the cases where it is allowed to have different obligors on the IRRRL than on the original loan, lenders must consider how they are going to make sure that the borrowers are creditworthy. The VA advises the lender to check the mortgage payment record in lieu of obtaining a full credit report, to obtain a statement from the obligor(s) on the IRRRL asserting their ability to make payments on the new loan with the other obligor’s income. If appropriate, the lender may also ask for a statement concerning the addition of a different spouse or a change in the number of dependents. If you have a situation not outlined above and are hoping to get an IRRRL with different obligors on the loan, it’s best to consult directly with your lender to determine whether an IRRRL will be possible.