If you currently have a mortgage with the Department of Veterans Affairs (VA), you can sidestep a lot of the concerns other homeowners have to deal with when they refinance their homes. The economy may have taken its toll and hurt your credit, your income may have been reduced and your home's value may have dropped to the point that you're underwater on your mortgage. However, for a VA refinance, it doesn't matter.
The Interest Rate Reduction Refinancing Loan (IRRRL), streamline VA refinance, or a VA-to-VA refi allows you to reduce your interest rate or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan at very little cost. Since the VA already guarantees your current mortgage, your ability to qualify for a refinance isn't much of an issue. Your job as a borrower is pretty easy, but the government strongly recommends that you shop for your mortgage refinance with several mortgage lenders. Here's why:
VA Mortgage Interest Rates Are Not Regulated by the Government
According to the VA, some mortgage lenders may claim that they are the only ones granted the authority to underwrite and fund IRRRLs. That is simply not true; any lender may originate an IRRRL for you. VA refinance rates and terms can vary widely from lender to lender; don't let anyone convince you that you can't shop around. Get mortgage quotes from several lenders, and select a competitive lender with a professional and courteous loan agent.
Some Mortgage Lenders' Requirements Exceed Those of the VA
Another reason to shop for your VA home loan is that, while the VA does not require a credit package or an appraisal, some mortgage lenders will. This could increase the cost to you, possibly to the point where your refinance savings disappear. So ask upfront if a lender requires these things to fund an IRRRL for you.
Some Lenders' Fees Are More Competitive
The VA warns that some mortgage lenders try to claim that the VA requires certain fees, which must be wrapped into the loan. However, the only fee required by the VA is its funding fee of 0.5% of your loan amount, which can be financed. Any other fees charged by the lender are its own and may be negotiable (hence the need to shop carefully for your mortgage).
Other VA Streamline Refinance Facts
- No certificate of eligibility is required. Your lender can simply email the VA for confirmation of your eligibility.
- The property does not need to be your primary residence. You only need to prove that you occupied it when you obtained the original mortgage.
- There are limits to how much you can borrow. You can receive no cash from this loan, and it may not exceed the sum of the outstanding balance on the current mortgage plus any allowable fees and closing costs (including funding fee and up to 2 discount points). You are also allowed to finance up to $6,000 in energy efficiency improvements.
- The new interest rate must be lower than the old rate, unless you're refinancing from an ARM to a fixed-rate loan. You may also refinance from a fixed rate loan to an ARM.
- The current loan must have been obtained with your entitlement. If you assumed someone else's VA mortgage, you are not allowed to get an IRRRL.
- The lender does not need to verify your income, unless your payment will increase by 20% or more. For example, if you are converting an adjustable rate to a fixed rate or exchanging a 30-year loan for a 15-year loan, you may have to prove that you can afford the higher payment.
- You may be able to finance past-due amounts and late charges into the new loan. Your lender will have to get special approval from the VA to do this. Some mortgage lenders will not do an IRRRL if you have any late mortgage payments (more than 30 days delinquent) in the past year.
- You are not allowed to refinance any other debts with an IRRRL. If you have a second mortgage, it can't be paid off with refinance proceeds; the second lien holder must agree to subordinate its lien to the new VA mortgage.
The lender you select to close your VA streamline refinance determines how easy your mortgage application will be, as well as what your costs are and what your interest rate may be. Shop with several lenders, obtain Good Faith Estimates (GFEs) and know the VA's rules. You may be able to lower your interest rate and payment with very little effort.
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.