Deciphering the VA Lender’s Handbook Chapter 6 Part 7
The last six articles covered in-depth information about the Interest Rate Reduction Refinance Loan (IRRRL), the VA loan program’s streamline refinance option. For everything you ever wanted to know about IRRRLs, check out those articles. This article is going to go deeper into something that was touched on in the last article: when an IRRRL is used to refinance a loan that is 30 days or more past due. Loans that are 30 days or more past due are considered delinquent and must be handled differently than loans that are up-to-date or even less than 30 days past due. The biggest difference in the way it must be handled is that prior approval by the VA is required – even if the lender has automatic authority.
Before the lender is permitted to submit the IRRRL to the VA for prior approval, they are required to obtain whatever information and perform whatever analysis is needed to determine that the cause of the delinquency has been resolved and the veteran is willing and able to make the proposed loan payments. While the lender has some flexibility in what documentation and supporting evidence can be used, it will still depend primarily on debt-to-income ratio and whether the borrower’s work is reliable and stable enough to take a risk on. Usually, the cause of delinquency is either out-of-control credit card debt or the loss of a job. In either of these cases, if the issue has been resolved, usually there’s a paper trail to serve as evidence.
If, after gathering information and analyzing it, the lender determines that the cause of delinquency has been taken care of and the VA-eligible borrower is willing and able to make the monthly payments, then they submit a packet to the VA that includes a great deal of things. First, the full name of the veteran and all other obligated parties, the number of the VA loan being refinanced as well as the month and year the original loan was closed, the identity of the lender making the proposal, the loan amount, interest rate, and term of the new vs. old loan, and any discounts to be charged.
The lender must also include a statement by the VA-eligible borrower that he or she understands the effects of the IRRRL including the new interest rate and monthly payments and how long it will take to recoup the closing costs. The borrower will also have to sign a document certifying their occupancy status, whether it was previously occupied or they are currently occupying it. The lender will also add several worksheets, the borrower’s Certificate of Eligibility, and the Uniform Residential Loan Application (URLA). However, the lender determined that the borrower is ready for an IRRRL must also be attached to the packet. The lender must include evidence pointing to the cause of the delinquency, as well as evidence that shows the cause has been taken care of.
Lastly, the lender must include a credit report, a current pay stub and verification of the borrower’s employment, a loan analysis and documentation of any energy efficiency improvements that are to be included on the loan. After submitting the packet, the lender must wait until he or she hears back from the VA. The VA will inform the lender of its decision, and provide a Certificate of Commitment if the loan application has been approved. Once approved, the lender will work with the borrower on closing the IRRRL. The lender has 60 days from the date of closing to report the loan to the VA.
When reporting the IRRRL, the lender shouldn’t need any information above and beyond what was obtained in order to apply for prior approval, except a receipt for the funding fee, whether it was paid in full at closing or rolled into the loan amount. As a borrower, it’s important for you to know that any late payments and late charges – and even the cost of legal actions taken by the lender – can be included in the loan amount. In some cases, the impact to the monthly payments can be great enough that the lender must reconsider whether the borrower is qualified for the loan.