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Lesson 10.4

VA Interest Rate Reduction Refinance Loans (IRRRL)

VA Streamline Refinances

The VA Streamline refinance is one of the most powerful refinance options for homeowners who already have a VA Loan. You'll also hear this called an Interest Rate Reduction Refinance Loan, or an IRRRL (often pronounced “Earl”).

Current VA loan holders can use a VA Streamline to refinance into a lower mortgage rate or out of an adjustable-rate mortgage and into a fixed-rate loan.

Streamline refinance loans typically require little paperwork and often require little-to-no costs out of pocket. Streamline borrowers can roll closing costs into their overall loan amount.

In some cases, VA Streamline borrowers won't need an appraisal or even to meet a credit score benchmark. Requirements will vary depending on the lender and your specific situation.

VA IRRRL Underwriting & Appraisal

The VA does not require credit underwriting or an appraisal for an Interest Rate Reduction Refinance Loan. But some lenders may require both, depending on their guidelines and each homeowner’s specific situation.

Veterans United currently requires a 620 FICO score for prospective Streamline borrowers. We also require loans to be current with no 30-day late payments in the previous 12 months.

We will document a two-year employment history, but we won’t typically need to consider income or asset figures unless the new mortgage payment will be increasing by more than 20 percent or there are concerns about income stability

In these cases, the IRRRL becomes “credit qualifying,” which means we will need all applicable income documents, including full Verification of Employment, tax transcripts and more.

We will conduct a verbal Verification of Employment (VVOE) before the refinance can close. Borrowers who were employed at the time of the current loan closing must still be earning income at the time of their new loan closing.

The income can come from:

If the borrower was employed at the time of closing on their current loan, but is now unemployed and not earning any income, the loan will be downgraded to credit qualifying.

Guidelines on appraisals can also vary by lender. Some lenders may be able to use an Automated Valuation Model (AVM) to assess the home’s value. This is a tool that provides an estimate of a property’s value based on mathematical models and publicly available data. With an AVM, there is no in-person evaluation of the property by a VA appraiser.

Streamline refinances also don’t typically require a pest inspection or well test. Talk with a Veterans United loan specialist about your specific situation.

Last, the maximum loan term is the term of the original VA loan plus 10 years, not to exceed 30 years and 32 days.

For example, a veteran who’s refinancing a VA loan with a 15-year term could have at most a 25-year term on the IRRRL.

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Closing Costs & Loan-to-Value (LTV)

Borrowers have fewer closing costs to contend with on a refinance than a purchase loan.

Some lenders may charge a 1 percent origination fee, while others might not. Ultimately, costs and fees can vary by lender.

Unlike with a VA purchase loan, homeowners seeking an IRRRL can finance all of their closing costs, including up to two discount points and the VA Funding Fee.

IRRRL borrowers who are not exempt will need to pay the VA Funding Fee. The good news is that this fee is significantly lower for an IRRRL (0.5 percent) compared to the fee for first-time and subsequent purchase and Cash-Out refinance loans.

For example, the funding fee on a typical $200,000 loan would be $1,000. Veterans and service members who receive compensation for a service-connected disability don’t pay this fee.

Homeowners can also look to obtain a VA Energy Efficient Mortgage to finance qualified energy-efficiency improvements.

Guidelines on maximum loan-to-value ratio (LTV) for Streamlines will vary by lender.

At Veterans United, our cap on LTV is currently 105 percent, including the financing of all closing costs, prepaid escrow funds, the VA Funding Fee and any acceptable energy-efficiency improvements.

IRRRLs & Occupancy

VA loans typically require the borrower to intend to occupy the home as their primary residence. But IRRRLs are the sole exception.

Previous occupancy is all that's required for a VA Streamline, meaning you can look to refinance a secondary or investment property you no longer live in. That's a great option for borrowers renting out a home at a previous duty station, for example.

Homeowners can also use an IRRRL to refinance the loan on their current property.

Seasoning & Recoupment

Lenders may have guidelines covering both the seasoning of your current mortgage and the time it takes for you to recoup the cost of your refinance.

Seasoning refers to the age of your current home loan and often the number of payments you’ve made. At Veterans United, borrowers must have six months’ worth of seasoning on their current mortgage and have made six mortgage payments on that loan before being able to refinance it with an IRRRL.

Recoupment considers how long it takes veterans to recover the costs of their refinance loan by looking at their new monthly savings.

For example, if the costs and fees to close on an IRRRL come out to $4,000 and the new loan saves the homeowner $125 per month, the time to recoup those upfront expenses would be 32 months (4,000 / 125 = 32).

At Veterans United, the time to recoup costs and fees must be 36 months or less. This calculation does not include escrow funds.

Entitlement & IRRRLs

VA Streamlines are unique when it comes to VA loan entitlement. Getting an IRRRL does not require the use of new or additional entitlement.

Whatever amount of VA loan entitlement was used to secure the original purchase loan remains the same for the new loan, regardless of the loan amount.

Having a higher or lower loan amount on the IRRRL can affect the guaranty amount, which reflects how much lenders would recoup in the event of default.

But it cannot affect the amount of a veteran’s previously used and entitlement.

Who Can Be on an IRRRL?

Generally, the borrowers on the original VA loan need to be on the new IRRRL, unless death or divorce of an applicant occurs.

Lenders could not look to remove a currently married or separated spouse from the new loan if they’re obligated on the old one.

This table provides a look at who can typically be obligated on a new IRRRL:

Parties on Old VA Loan

Parties on new IRRRL

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 nonveteran 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 nonveteran joint loan obligors

Non veteran alone

No

Scenarios beyond what’s in this table will often require additional scrutiny by a lender’s underwriting team and the VA.

Talk with a Veterans United loan specialist if you have questions about who can be on your IRRRL.

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