No, IRRRL is not some foreign version of the name Earl, though it does sound exactly the same. Technically, IRRRL is not a verb, either, but once you know what an IRRRL is, you’ll know what someone means when they use it as one. IRRRL stands for Interest Rate Reduction Refinance Loan. IRRRL is the VA’s streamline refinance option. A streamline refinance is where the information for a refinance is largely taken from the previous loan, cutting down on most of the time and grief associated with underwriting a loan. Streamline refinances are different from typical refinances because a typical refinance is handled nearly identically to a new purchase loan; you’ll need to get another credit check, fill out a whole application with income and employment information, the whole 9 yards. The VA streamline refinance option, known fondly as IRRRL, avoids most of that hassle and allows the lender to use existing information for the most part.
Now let’s get specific. Let’s say we have a borrower who has been using a VA loan to pay off his house. He’s now in the process of refinancing his home with an IRRRL, but plans on renting the house later and is hoping to purchase an even bigger home with his VA loan benefits. Can he do this? Short answer: that depends. Long answer: start with the short answer and read on through the rest of the article. For our borrower (let’s call him Fred), there are a few important questions that need to be answered before he can get a definitive “yes” or “no” on his dilemma. One of the first questions we would need to ask Fred is how much of his VA loan entitlement he has left, if any at all. If the answer to this question is “not enough” or “none”, then we need go no further; Fred cannot get a bigger home after he IRRRL’s his current one.
If Fred gets past the first question, he faces another one: What is his current debt-to-income ratio and what would it become upon purchasing a second home with his VA loan benefits? The magic number here is 40, as in 40%. If either of the above debt-to-income ratios is above 40%, then Fred’s hopes and dreams get squashed like the frog from Frogger. These two questions really have one goal, and that is to ascertain whether Fred can really afford a second loan. If Fred can’t, then there’s no way he’ll be able to use his VA benefits to purchase another home. Of course, Fred’s probably wondering if the amount he’ll be charging tenants for rent on the first home can be used to offset his debt-to-income ratio. The answer to that question hinges on a far more important question: is Fred’s lender willing to work with him?
There are some specific rules regarding IRRRLs in the VA Lender’s Handbook, or VA Pamphlet 26-7. Essentially the rules say that the veteran’s entitlement will remain the same before and after the IRRRL. From the Handbook: “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.” In other words, if Fred has enough entitlement leftover to buy a second home before he gets an IRRRL, he’ll still be able to after his IRRRL. On the flipside, though, the original entitlement that Fred used to get the first loan will not be restored in any amount until the IRRRL is paid completely off.
So theoretically, if Fred has enough entitlement left to buy a second home, he will be able to get the bigger home he so strongly desires. However, we still have one big question to resolve: Will the lender work with Fred? This is not an automatic yes. If Fred can safely answer the first two questions affirmatively, the lender can still run Fred through the proverbial ringer and check out all his financial qualifications, credit scores, income information and any other compensating factors that may come into play, and is never obligated to approve a loan. That being said, if Fred can reasonably afford the loan and there’s not too much of a risk that he will default on either loan, the lender would be a fool not to allow it, because it means more money for him. Usually, if the borrower can financially handle the second mortgage, the lender will approve the loan and the borrower can purchase their second home.