Veterans have many benefits regarding home loans. If you served the right amount of time and have an honorable discharge, you have the benefit of securing a no down payment loan with competitive interest rates. You also have the benefit of a simple refinance called the VA Interest Rate Reduction Refinance Loan. This program allows you to lower your interest rate without verifying anything except your mortgage payment history. However, the program comes with a fee. The VA Funding Fee. The good news is, some veterans qualify for a VA IRRRL Funding Fee exemption. Are you one of them?
What is the VA Funding Fee?
First, let’s look at the funding fee. It might seem unfair to pay an extra expense up front, but it helps you secure the VA loan. The VA uses this money to guarantee the loans they approve. Without the reserve funds, they could not pay back the banks that have defaulted loans. Of course, the goal of the VA is to not have any loans default, but this is not a perfect world. Borrowers default whether due to their fault or something out of their control.
The amount you pay for the funding fee differs. For example, on your first VA loan, you likely paid 2.15% of the loan amount. On a $150,000 loan, this equals $3,225. You may have paid it out of your own pocket or wrapped it into the loan. Either way, you pay for it. When you use your VA benefit for a streamline refinance, you only pay 0.5% of the loan amount. This is a significant decrease. On the same $150,000 loan, you would pay $750. This is a $2,475 difference. That’s not too bad, but it is still an added expense.
Paying the Funding Fee
The funding fee you pay goes directly to the VA. Even though you pay it at the closing to the lender, the VA gets the money. It is the lender’s responsibility to pay the fee to the VA via the required system. This is why you must use approved VA lenders only. The funding fee is what keeps the VA loans going. They do not receive government funding – it is a self-funded system.
An Immediate Exemption
Some borrowers will have an immediate exemption from the VA funding fee. In fact, some do not even pay it with the original use of their benefits. These are the veterans who have a disability that occurred as a result of their time in the military. Their Certificate of Entitlement shows the disability rating which lets lenders know they do not owe the funding fee. About 33% of veterans qualify for this exemption.
The borrowers falling into this category meet one of the following situations:
- They currently receive disability pay from the military
- They qualify for disability but still receive active duty pay or retirement pay
- You qualify for disability based on the military exam prior to discharge
Another exemption which does not relate to the veteran directly is if the veteran passed away during active duty or as a complication of active duty. His/her spouse may refinance without the VA funding fee if they were on the loan prior to the occurrence.
VA IRRRL Funding Fee Exemption Refunds
There are cases when the lender cannot determine a borrower’s right to the VA IRRRL Funding Fee exemption until after he closes on the loan. This is not unusual. These borrowers may receive a refund for the funding fee they paid; however, there is a specific timeframe they must meet.
In general, your disability must be pending prior to the date of your application for the VA streamline loan. If you become disabled after this date, you will not be eligible for a refund. In addition, the date of your disability must pre-date the date of your application. In other words, the VA must retroactively date your disability.
If you fall into this category, you may receive a refund of the funding fee you paid. The method you paid will determine how you receive the refund. If you:
- Paid in cash at the closing – You will receive a cash refund
- Wrapped the fee into your loan – You will receive a credit to your loan balance
If you become eligible for disability after you close on your VA IRRRL, you can easily request your refund. You must contact your regional VA loan center. Your lender can help you determine which center you should contact.
The Benefits of the VA IRRRL
Even if you are not eligible for a VA IRRRL Funding Fee exemption, the program offers many benefits. The most obvious is the lower mortgage payment you can obtain. Saving money every month may help you in everyday life. It will also help you pay off your mortgage faster. With less interest to pay, you put more money towards the principal each month.
Other benefits of the VA IRRRL program include:
- No income verification requirements in most cases
- You can be upside down on your loan and still refinance
- You don’t have to verify assets
- You don’t have to worry about your credit history (in most cases)
Keep in mind, many lenders have their own overlays. They do this to protect themselves. This does not mean every lender does, though. Shop around with different VA approved lenders to find the right loan for you. You do not have to use your current lender – any VA approved lender can help you refinance your VA loan.
The bottom line is that the VA IRRRL program is usually worth it. If you suffered a disability or lost your veteran spouse during active duty, it may be even more lucrative for you to refinance. Find out if you are eligible for a VA IRRRL Funding Fee exemption and then take the appropriate steps to secure the exemption. If you find out after the fact, don’t be afraid to ask for a refund. You are entitled to it!