How to refinance a VA mortgage with an IRRRL
If you're a veteran, have a VA home loan and want to refinance, consider yourself lucky. VA mortgages can be refinanced easily, quickly and inexpensively. Here's what you need to know and where you need to go.
Mortgage rates are still at very low levels, but many who would like to refinance and who could benefit by refinancing are unable to because of falling home values, job losses or credit problems. However, borrowers with VA mortgages are in luck. If you have such a loan, you could refinance into a significantly lower interest rate or trade an adjustable rate mortgage (ARM) for a fixed-rate home loan regardless of your income, credit or home's value. The loan that can get this accomplished is called an Interest Rate Reduction Refinancing Loan, or IRRRL.
What's required to get approved for a VA-to-VA refinance?
For approval, you need to do an occupancy certification. If you were to refinance with a conventional mortgage, and no longer used the property as your primary residence, there would be added fees (usually several points). In many cases, the extra charges would make it unprofitable to refinance. But you can refinance a VA loan to another VA loan with no added fees, and all you have to do is certify that you used to occupy the home as your primary residence.
If you have a second mortgage, you need to get the second mortgage subordinated to the new loan. Your escrow company should be able to take care of this for you.
Next, you need to shop for a mortgage lender. You do not have to go to the current servicer of your loan, nor to the lender from which you originally obtained your VA loan. Some mortgage lenders will try to tell you that only they are approved to refinance your loan; that's not true. In fact, even lenders not approved to do VA loans can approve IRRRLs. Do yourself a favor and get several mortgage quotes and make your best deal. The government does not set VA mortgage rates; different lenders will have different interest rates and terms.
Finally, you need to compare fees. The VA has reported that some lenders tell borrowers that certain fees are required by the government. In fact, the only required fee is the funding fee. Other lender charges may apply but are imposed at the lender's discretion.
What's not required to get approved for a VA-to-VA refinance?
You are not required to bring in cash to close on your VA refinance; instead, you can finance costs into your loan amount. Your maximum loan amount is calculated by taking the existing VA loan balance plus allowable fees and charges, including a maximum of two discount points, plus the cost of allowable energy-efficient improvements (up to $6,000), plus the funding fee (1.5 percent). You aren't allowed to take cash out with an IRRRL. Allowable energy improvements must have been completed within 90 days preceding the funding of the loan for you to be reimbursed for them. You can, of course, choose to pay your closing costs out of pocket and keep your loan amount unchanged.
As long as you are current on your VA mortgage, you aren't required to have good credit to get your IRRL approved. There is no credit underwriting performed unless your payment will increase by 20 percent or more (if, for example, you were to refinance from a 30-year mortgage to a 15-year home loan) or you are more than 30 days behind on your current home loan. If you have an active Chapter 13 bankruptcy, your new refinance may have to be approved by the bankruptcy trustee or judge.
You don't need an appraisal. This can be a boon to those whose homes have lost value and who would otherwise not qualify for a mortgage refinance. You don't need to document your income. In fact, you don't even need a job.
You don't need a certificate of eligibility either. Your lender may use the VA's automated Prior Loan Validation procedure for an interest-rate-reduction refinance, or you could bring in your certificate if you have it.
Why is it so easy?
Refinancing your VA loan is so easy because the VA guarantees your loan -- it's already on the hook. Allowing you to refinance -- even if your credit rating has tanked, your mortgage is underwater or you're unemployed -- can only make it easier for you to make your mortgage payments and perhaps lessen your chances of ending up in default.
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Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.