When you have a VA mortgage, a VA streamline refinance may be the simplest option to minimize your interest rate. This form of refinance usually does not necessitate an appraisal, credit check, or underwriting, all of which are costly to borrowers in terms of both money and time.
Rates for VA streamline refinances are also competitive with rates on conventional loan refinances. While they have significant limitations, such as not allowing homeowners to tap into their equity, they are intended to assist qualified military service members in obtaining inexpensive and stable housing.
What Is a VA Interest Rate Reduction Refinance Loan (VA IRRRL)?
A VA IRRRL (Veterans Administration interest rate reduction refinance loan) is a house loan that replaces your existing VA mortgage with a new loan with better terms. This form of mortgage is sometimes referred to as a VA streamline refinance.
The new loan could be more advantageous in a number of ways:
- By lowering your interest rate, you may be able to lower your monthly payment.
- It could help you get out of an adjustable-rate mortgage (ARM) and into a fixed-rate mortgage, giving you a more consistent monthly payment.
- It may have a cheaper interest rate and a shorter period, allowing you to pay off your debt faster and save money on interest.
However, if the new loan has a longer duration, it can’t be more than 30 years plus 32 days, or 10 years longer than the original loan’s term, whichever is shorter.
In other words, if you’re refinancing a 15-year loan, you won’t be able to refinance into a 30-year loan, but you will be able to refinance into a 25-year loan.
Is it possible for homeowners to refinance into an ARM with an IRRRL through the VA? Yes. Your new mortgage, however, must have a lower interest rate than your present one.
An IRRRL can even be used to get out of a loan that you’ve defaulted on. To be eligible for a streamline refinance, the VA does not require you to stay current on your loan.
However, some lenders do, so if you’re in this circumstance, you might need to shop around a little more to get approved.
While you can roll your late fines and missed payments into the new loan for a fresh start, you may not be authorized for a new loan if your finances do not support your ability to pay it back.
The IRRRL program of the Veterans Administration is designed to help borrowers get into a better financial condition, not one that is unsustainable.
How a VA Streamline Refinance Works
To acquire a VA streamline refinance, you must apply with a lender who specializes in this sort of loan. Working with a VA loan specialist can make the process go more smoothly because they are experts in VA loans, which differ from commercial loans in a number of ways. The Veterans Administration is not a lender in and of itself.
Applying for a house loan with at least three lenders, like with any refinance, is a good idea. Even though it’s a government-guaranteed loan, the interest rate and costs you’ll pay on an IRRRL will vary by lender.
You’ll also want to calculate the break-even time to see when you’ll start making money thanks to your new loan’s better terms—and after you’ve paid your closing charges.
Closing costs / monthly savings = number of months to break even
Your break-even period, according to the VA, should be fewer than or equal to 36 months (three years). Your lender must provide you with a written comparison of your existing and new loans, as well as the break-even period.
If you’ve discovered your ideal home and want to make this the only mortgage you ever take out, finding the best interest rate is critical.
If you suspect you’ll be obtaining PCS orders in the next two years, you’ll want to minimize the amount of money taken out of your account upon closing:
Rolling your closing fees into your new loan is one way to achieve this (that is, finance your closing costs).
Another option is to negotiate a higher interest rate in exchange for the lender paying your closing costs.
A mortgage with a higher annual percentage rate (APR) can be a better choice. Choose the option that will save you the most money.
Because of funded closing costs, a shorter loan term, or a switch from an ARM to a fixed-rate loan, the VA says it’s fine if your IRRRL results in a higher monthly payment.
If your monthly payment is going to increase by 20% or more, you’ll need to show the lender that you have enough consistent and regular income to cover the increased payment. To put it another way, you’ll have to meet the loan’s requirements.
VA IRRRL Qualifications
The following are the two main requirements for a VA streamline refinance:
- It must be a VA loan that you want to refinance.
- The home you seek to refinance must be your principal residence right now or in the past.
You’ll also need your Certificate of Eligibility, which you may get from the VA electronically if you don’t already have it.
The new loan must also adhere to the following interest-rate lowering guidelines:
When switching from one fixed-rate loan to another, the new loan must have a lower interest rate by at least half a percentage point.
When switching from a fixed-rate to an adjustable-rate loan, the new loan must have a lower interest rate by at least two percentage points.
You can’t undertake an IRRRL unless your current VA loan has been open for at least 210 days and you’ve made six consecutive monthly payments.
If you’ve been on a forbearance plan and missed payments, those months don’t count against your six consecutive monthly payments.
An IRRRL does not require a credit check or underwriter clearance, just like an FHA streamline refinance. This is fantastic news not only if you want to save time, but it’s also good news if your credit score or income has dropped.
Can You Take Cash Out with a VA IRRRL Refinance?
A VA IRRRL refinance does not allow you to cash out any of your home equity. This guideline is so important to the VA that it requires lenders to round down your loan amount if required to avoid giving you more than $500 at closing.
The sole exception is that you may be eligible for up to $6,000 in rebates for energy-efficient home renovations made within 90 days of closing.
Similarly, you cannot use your new VA loan to pay off a second mortgage, such as a home equity loan or line of credit.
You can get cash back by refinancing your house with a VA cash-out refinance loan, which needs credit qualification and underwriting and requires you to live in the property as your primary residence.
To summarize, let’s go over the VA streamline refinancing benefits and drawbacks we’ve discussed in this article.
VA IRRRL Benefits
- Reduce your interest rate or get a monthly payment that is fixed.
- Fees, closing expenses, and up to two discount points can all be rolled into the new loan.
- A funding fee of 0.5 percent of the loan amount is required.
- Don’t pay for an appraisal (usually not required)
- Remove the credit check from the equation (usually not required)
- Loan underwriting should be avoided (usually not required)
- Even if your loan is past due, refinance (credit check will be required)
- Refinance even if the house isn’t your primary residence any more.
- Up to $6,000 in home energy efficiency improvements can be financed.
VA IRRRL Drawbacks
- An appraisal may be required by the lender.
- A credit check may be required by the lender.
- Loan underwriting may be required by the lender.
- There is no way to get your money back.
- A VA loan is the only type of debt that can be refinanced.
- A home equity loan cannot be refinanced.
- Closing costs will be paid either directly or indirectly by you.