Winning the refinance battle
According to a recent report, returning veterans are not earning high enough salaries to afford housing in major metropolitan areas across the U.S. Unemployment and underemployment have put housing out of reach for many of our returning service members, according to data released by the Center for Housing Policy.
For those veterans who are already homeowners, affordability has become increasingly difficult to maintain.
The Department of Veterans Affairs' Interest Rate Reduction Refinancing Loan (IRRRL) is a streamlined refinance product--with few restrictions and low documentation requirements--that lowers the interest rate for veteran homeowners.
VA IRRRL qualifications
VA loans, available to veterans and spouses of veterans killed while on duty, are attractive because they do not require a down payment or mortgage insurance.
However, while the IRRRL is designed to be less restrictive than the standard VA refinance, all VA lenders must adhere to the following guidelines when approving an IRRRL:
- The new loan must result in a lower mortgage rate (unless you're refinancing from an ARM to a fixed-rate loan)
- Homeowners must be current and have no more than one 30-day late payment in the last 12 months
- There is a funding fee equal to 0.5 percent of the loan amount (this expense can be paid at closing or rolled into the loan amount)
- No cash-out refinancing
- Borrowers must be existing VA borrowers
- You cannot refinance two mortgages into one IRRRL. Your second mortgage must be subordinated to your new loan
"While the VA does not require any credit check, an appraisal or proof of income, most lenders have overlays that require some type of credit qualification and what we call a 'drive-by' appraisal to check that the property looks livable," says Deborah Deflores, vice president and chief credit officer of Carrington Mortgage Holdings in Santa Ana, Calif.
At Carrington Mortgage, for example, in order to qualify for an IRRRL, homeowners must have:
- A credit score of 640 or higher
- Made their past 12 months of mortgage payments in full and on time
- A verifiable source of income
- An estimated appraisal by a certified appraiser who checks comparable properties and the outside of the property
At Inlanta Mortgage in Johnston, Iowa, partner/manager Kyra Sommerville Moore says homeowners must meet similar qualifications, but she says some lenders will approve loans with a credit score as low as 620.
"Most lenders are using similar underwriting guidelines, the main difference is that some want a full appraisal," says Deflores.
IRRRL costs and fees
Thaxton says that VA borrowers who have a disability can have the 0.5 percent funding fee waived. Otherwise, borrowers are allowed to either pay cash at closing or wrap their closing costs into their loan balance. While closing costs vary by location, Moore says they typically cost about $2,400 in her area.
Deflores says borrowers can apply with their current lender, but should shop around with several VA mortgage lenders to compare interest rates, fees and qualification requirements.
Underwater VA borrowers
Moore says that while an IRRRL can be helpful to homeowners with low equity, she says few lenders will approve an IRRRL with a loan-to-value ratio above 100 percent. VA guidelines say that a 100 percent LTV mortgage can be approved based on the unpaid principal balance, but many VA homeowners, particularly those who were not required to make a down payment, owe more than the current value of their home.
Alternatives to an IRRRL
In addition to an IRRRL, VA borrowers have the option to refinance to either a conventional loan or a standard VA refinance with full documentation. Moore says borrowers with good credit and 20 percent or more equity may want to refinance into a conventional loan to avoid the IRRRL's funding fee.
Borrowers who want to take cash out of their home during a refinance and those who want to switch to a shorter-term mortgage (that will increase their monthly payments by more than 20 percent) must apply for a standard VA loan, says Thaxton. She says that most lenders cap a cash-out VA refinance at 90 percent LTV, even though the VA allows 100 percent LTV cash-out refinancing.
"Even if the borrowers need to apply for a standard VA refinance with full documentation, it can be easier to qualify for a VA loan than a conventional loan because they sometimes allow a debt-to-income ratio of over 50 percent," says Deflores. However, in order to qualify, borrowers with a high debt-to-income ratio would need to compensate with excellent credit or more home equity.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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