The VA IRRRL program offers veterans the benefit of refinancing their current VA loan. While you can use any program to refinance, there are distinct advantages to using the VA IRRRL program. For starters, you don’t have to re-verify many aspects of your loan application. The VA allows lenders to approve the refinance without verifying things like income, credit, or even the value of the home.
Why Don’t you Need an Appraisal?
You may wonder, why don’t you need an appraisal? How does the lender or VA know what your home is worth? In this instance, it doesn’t matter. The VA knows the value of your home when you bought the house and that is what they rely on for your refinance. They are able to do this because they restrict the amount you can refinance.
Your new loan amount may not exceed the following:
Outstanding principal balance of current loan + allowed closing costs + funding fee = New loan amount
You cannot use this loan to take cash out of the equity. It is strictly a rate/term refinance. This way the VA can control the outcome of the program. Without using an appraisal, the lender cannot determine how much equity you have in the home. Restricting the loan amount enables the VA to get away with this method.
What the VA Does Need
So you know what you don’t need – an appraisal, income documents, or a credit score. So, what do you need for approval? You must provide proof that you occupied the home while you held your original VA loan. You must also prove that you made timely mortgage payments over the last 12 months. You can only have one late mortgage payment during this time. It cannot be more than 30-days late and it cannot be within the last 3 months.
One other thing you need is a benefit for the loan. Generally, this means a lower payment. If you refinance, it should be because you can secure a lower interest rate. The lower rate means a lower payment, which is your benefit for the loan. In some cases, you can refinance out of an ARM into a fixed rate or from a 30-year term to a 15-year term. These payments may not be lower than your current payment; however, you still lower the risk of the loan by changing the product.
Do Lenders Require Appraisals?
Just like many other loan programs, lenders can add their own requirements onto the VA’s requirements. In this case, it may mean requiring an appraisal. This is rare, though. They typically only require this if they suspect the value dropped significantly. A lender may also require an appraisal if they think something may be wrong with the house. Usually, however, this is not an issue. If the lender does anything, they may just run an automatic valuation on the property to make sure the value is near what it was when you purchased it.
Lenders, may require other things, though. For example, it is not uncommon for a lender to require you to provide proof of your employment. Even if they don’t ask for proof of your income, they may want the satisfaction of knowing you are employed. Other lenders may require proof of your credit score or want to look at your credit history. The VA allows lenders to add these requirements since the lender funds the loan, not the VA.
One thing every lender will require is verification of your assets if you are not wrapping everything into the loan. The VA does allow you to wrap your closing costs into the loan, but this is not always the best choice. If you have not held your VA loan for very long, you still owe close to what you borrowed. Adding the closing costs to that amount only increases the amount you owe. This puts you back at square one in terms of owning your home.
If you pay the closing costs on your own, you must prove the assets to pay them. The lender may ask for the last 12 months’ of bank statements to prove that you have the funds. They look to make sure you don’t have any unusual activity in your accounts, such as large, unexplained deposits. If there are large deposits, make sure they are seasoned, which means they sat in your account for at least 12 months. This way the lender can use these funds as your assets for the closing costs.
Do Ever Need to Verify Income?
There are some cases where you may need to verify your income. Some lenders just require it all of the time. Other lenders require it when you change your term or the type of loan. For example, when you refinance from an ARM to a fixed rate loan. In this case, your payment may go up, which is cause for concern. The lender needs to make sure you can afford the higher payment. They must verify your income in order to determine your debt ratio. This helps them make the right decision.
The fact that you don’t need an appraisal for a VA IRRRL mortgage is a great benefit. One benefit, of course, is that you save several hundred dollars on the cost of the loan. In addition, you have the opportunity to refinance even if you are underwater on your loan. This means you owe more than the home is worth. With a timely payment history, you will not have to worry if you are upside down on the loan. A lender can still refinance your loan and not have to worry about the value. If you are upside down on your loan, it works to your benefit to refinance because you can lower your interest rate. This means you pay more principal on your loan each month. In the end, you will own the home faster.
It pays to look at your VA IRRRL options to see if you can refinance without paying for an appraisal for your home.