The VA IRRRL refinance offers veterans a great way to reduce their mortgage payment. If you currently hold a VA loan, you may be eligible for this program, allowing you to save money every month. The guidelines are simple and the process goes quickly for veterans. Before you jump in and refinance, though, you should determine how best to structure your refinance. Refinancing is not cheap and if you structure it incorrectly, you could end up harming your financial situation rather than helping it.
The Reason for the VA IRRRL Refinance
The VA IRRRL refinance is meant to help you lower your payment. Usually this is done by lowering your interest rate. Some borrowers, however, use it to refinance out of an adjustable rate mortgage either right before or right after it adjusts. In these cases, your payment may not decrease. However, the benefits of getting out of an ARM make it worth it. A fixed rate loan is often easier to afford than an adjustable rate loan.
The one thing you do not want to do with a VA refinance is increase your payment. While the IRRRL program would not allow that, you could inadvertently worsen your situation if you are not careful. Keep in mind that you want to lower your payment and that the only way to gain approval is to make sure your payment decreases.
Watch Your Closing Costs
We already mentioned that refinancing is expensive. This does not mean unaffordable, though. You just need to find the right lender. You do not have to use your current lender to refinance with the VA IRRRL program. You are free to use any approved VA lender. This way you can control your closing costs. By receiving quotes from at least 3 lenders, you can see what is available to you. What one lender charges might be completely different than another. Use these quotes to make sure you do not overpay for your refinance.
Rolling your closing costs into the loan is allowed by the VA. However, it may not work to your benefit. When you add the closing costs onto your loan amount, you increase your loan-to-value ratio. Since the VA does not require lenders to determine the new value of the home, you could be upside down on your home and not even know it. This means you owe more than the home is worth. Rather than rolling the costs into the loan, you could pay for them out of pocket. This alleviates the risk of being upside down on your loan.
What the VA Allows
When the VA determines your loan amount, they determine your current outstanding principal balance as well as the closing costs and any money you need for energy efficiency improvements. You are allowed to make up to $6,000 in energy efficiency changes in most cases. Again, the total of these amounts could easily bring you higher than the current value of your home. Give careful consideration to the closing costs you agree to pay. For example, the VA allows veterans to pay up to 2 discount points. These are points you pay in order to lower your interest rate. While this will give you a lower rate, it does not necessarily lower your payment if you roll the discount points into your loan.
The best way to structure your VA IRRRL refinance is to make the loan amount exactly the amount of your outstanding principal balance. If you made energy efficiency changes or plan to make them in the future, you may add those costs. Try to keep the costs as low as possible though. This way you do not increase your payment too much. However, there is a tradeoff with energy efficiency changes. Your utility bills must lower in order for you to qualify. In general, you will spend less money on replacing your utilities as well.
How to Qualify for the VA IRRRL Refinance
The good news is that refinancing with the VA IRRRL loan is very easy. The lender does not have to verify your income, credit, or the value of your home. The VA simply requires them to verify your mortgage payment history. They look at the last 12 months. What they don’t want to see is any late payments. If you have one 30-day late payment, it may be allowed. However, the late payment cannot be within the last 3 months. If you have any more than 1 late payment or your late payment was within the last 3 months, you will have to wait until another 12 months passes.
The only other requirements the VA has is that you prove that you lived in the home as your primary residence while you had the VA loan. You also must be able to reuse your entitlement. That is really all the VA requires. However, many lenders may add their own rules, such as verifying your credit score or verifying your employment.
If you have a circumstance where you know the value of your home dropped or you know your credit score fell, check around with different lenders. Not every lender verifies every aspect of the VA IRRRL refinance loan. Some lenders only verify what the VA requires. They assume if you could afford your higher mortgage payments that you will definitely be able to afford the lower ones after the refinance.
The VA IRRRL refinance is a great way to save money every month. It is also a great way to pay your loan off faster. If you are able to, consider refinancing into a 15-year term rather than a 30-year. If you cannot afford the 15-year payments, take the lower payment with the VA IRRRL and then make extra payments when you can. This is the best way to gain ownership in your home faster, helping you to pay your mortgage down faster and save money on interest.