If you have a VA loan now, you may have access to the powerful, yet simple VA IRRRL program. Known as the Interest Rate Reduction Refinance Loan, this program allows you to refinance with very little verification of your qualifications. VA lenders are able to use the qualifications from your current loan to approve you for the loan with a few minor exceptions.
Before you jump on board with this simplified program, you should know a few things.
You’ll Pay a Funding Fee Again
The VA IRRRL, just like your standard VA loan, will require a funding fee. The good news, though, is that it’s a lower fee. If you served in the active military, you probably paid 2.15% of your loan amount for the VA loan when you purchased your home. When you refinance with the VA IRRRL program, you’ll pay just 0.5% of the loan amount.
This fee helps the VA continue to offer the program to veterans without affecting taxpayers’ liabilities. The VA keeps the funds in a reserve account, which they use to pay the lenders that have defaulted VA loans. This way VA lenders are willing to give VA loans, using the VA’s flexible guidelines.
You Don’t Have to Use the Same Lender
Even though you currently have a VA loan, it doesn’t mean you have to use the same lender for the VA IRRRL program. You are free to shop around with other lenders to find the best deal. In fact, we recommend that you do shop around so that you can find the best deal available to you.
It may be a good idea to start with your current lender just to get an idea of what they might offer you. After you receive that offer, go ahead and apply with other lenders. This way you can compare interest rates, closing costs, and even turnaround times with each lender before you make a decision.
Lenders Can Add Overlays
Just because the VA has flexible rules regarding who qualifies for the VA loan streamline refinance, doesn’t mean lenders have to use only those rules. Lenders are free to add their own requirements, known as lender overlays.
The overlays may differ by lender too. The VA’s basic guidelines include:
- You must have timely mortgage payments for the last 12 months.
- You must prove that there is a benefit to the refinance, such as saving money or decreasing your term.
Lenders can add just about any requirements they want to the above. For example, some lenders may require a specific credit score even though the VA doesn’t require lenders to pull your credit. Other lenders may require a drive-by appraisal or an automatic (online) valuation of your home to determine your LTV. As you shop around for different lenders, you’ll want to ask if they have any overlays that you should know about.
You Can’t Take Cash Out of the Home
The VA IRRRL program is strictly a rate/term refinance. You cannot take any cash out of the property. This differs from a standard rate/term refinance with a conventional loan, which allows you to receive up to $2,000 in cash at the closing.
You must only refinance the exact amount of the outstanding principal balance on the loan as well as any closing costs, plus the funding fee. Beyond that, you cannot tap into the home’s equity with this program.
You Can Make Up to $6,000 in Energy Efficient Changes
Even though you can’t take cash out of the home’s equity, you may be eligible to make energy efficient changes to the home with this loan. The VA allows up to $6,000 in reimbursement for approved energy efficient changes you made to the home.
Keep in mind, the energy efficient changes must be approved by the VA and/or lender. You can’t just make changes and assume you’ll get reimbursed for them. The lender may require an Energy Audit from a professional to determine how much money you’ll save on your utilities as a result of the changes. If the savings aren’t enough, you may not get reimbursed for the costs. It’s best if you make the changes after you receive your lender’s approval.
You Don’t Have to Occupy the Property
Unlike when you bought the home with a VA loan, you don’t have to certify that you will occupy the property moving forward. Instead, you must certify that you previously occupied the property. This is one loophole that veterans often use in order to buy another home with their remaining VA benefits.
Veterans may only do this with the approval of the VA, though. Technically, VA loans are only for owner-occupied properties. But, if you have a valid reason to move, such as your job or the military relocated you, the VA may grant you an exception once you refinance with the VA IRRRL program.
The VA IRRRL is a great program that makes it easy for veterans to refinance their loan. It helps veterans save money on their loan without having to go through the full approval process. As long as you shop around for the right lender, you could find yourself a great deal on a VA refinance.