If you are a veteran, you can refinance without verifying very much information.Lenders can approve the VA loan as long as you have a timely payment history and there is a benefit to the refinance. It sounds simple enough, doesn’t it? Before you jump in headfirst, you should know what closing fees you can pay. The VA watches over the fees very carefully, whether you wrap them into the loan or not. This is one of the perks of the VA loan – you can only pay the allowable fees.
The Allowable Fees
The list of allowable fees is very straightforward. You can pay the following fees without worry:
- Origination fee
- Discount points to lower the interest rate
- Title fees including title search and insurance fees
- Flood zone fees (determining if you are in a flood zone)
- Recording fees
You can also pay the VA funding fee. In fact, you must pay it every time you take out a VA loan. In this case, the funding fee is lower than the fee you paid when you purchased the home. If you purchased your home recently, chances are you paid 2.15% of the loan amount. On your subsequent use for the VA IRRRL program, you only pay 0.5% of the loan amount. While the fee is lower, it is still a fee.
The Maximum Origination Fee
Now that you know the list of allowable fees, there are restrictions. For example, you cannot pay an origination fee higher than 1%. If you do pay the origination fee, you cannot pay the following fees:
- Lender application fees
- Lender processing fees
- Closing fees
- Rate lock fees
- Loan commitment fees
- Rate lock-in fees
- Tax service fees
The lender must choose between charging the 1% origination fee and itemizing the above fees. Either way, the above fees may not total more than 1% of the loan amount. The bottom line ends up the same. You either pay a flat fee for the origination or you pay itemized fees as above. On a $200,000 loan, the maximum amount you can pay is the same – $2,000.
The Maximum Discount Fee
Just as there is a maximum origination fee, there is a maximum discount fee. This amount is 2% of the loan amount. On the same $200,000 loan, you could pay up to $4,000 in discount fees. The discount fee helps you secure a lower interest rate. Because one of the rules of the VA IRRRL is to have a benefit to the refinance, this discount fee may come in handy. Generally, the VA requires your payment to decrease at least $50 in order to qualify. However, this might not benefit you. If you want a lower payment, you may pay the discount fee. This helps the lender provide you with a lower rate while still making a profit.
There is an exception to the rule. If you want to pay more than 2 discount points, you can. However, you cannot roll the entire amount in your closing costs. You may only roll 2% of the loan amount into the loan. If you choose to pay more discount points, you must pay it out of pocket.
If you choose to do this, you must then verify the assets you use to pay the discount points. Even though the VA IRRRL program does not require lenders to verify very much information, any money you pay must be verified. The lender must ask for the last few months’ worth of your bank statements. This helps the lender determine if the money you use is yours or not. If it is not your money, you must source it. The lender needs to verify that you did not take out a loan in order to pay the closing costs.
Credit Report and Appraisal Fees
Generally, the VA IRRRL program does not require a credit report or appraisal. However, some lenders require it. If they suspect you are a large credit risk or they cannot secure your mortgage payment history any other way, they may pull your credit. The same is true for the appraisal. The lender may require an appraisal because they know values in your area dropped significantly. They may not order a full appraisal, though. Many lenders order a drive-by, which is a simplified version of the appraisal. It is also less expensive. If you end up with a lender that requires a credit report or appraisal, they are allowable fees according to the VA. The only requirement the VA has on it is that the fees are reasonable and customary for the area.
Late Payment Fees
Lastly, if you have late payment fees on your account, you may be able to roll the costs into the loan. The VA allows the payment of these fees. However, you must gain approval for the loan with the late payments. Generally, the VA only allows one 30-day late payment within the last 12 months. In addition, that late payment cannot be within the last 3 months of the application date. If you do secure approval, you may be able to bring the loan current by paying the fees at the closing
The VA is strict about the fees it allows, but this is to protect the veterans. They don’t allow outrageous fees or anything out of the ordinary. They try to keep the loan as affordable as possible for veterans. Because the VA allows veterans to wrap the closing costs into the loan, they must limit what the veteran can pay. The idea behind the VA IRRRL is to make the payment more affordable, not more expensive. By controlling the allowable fees, the veteran can make sure the loan is more affordable for the veteran refinancing.
If you are a veteran that wants to refinance, make sure you shop around with different lenders. You do not need to use your current lender for the refinance. Any VA approved lender can refinance your loan. This gives you the chance to find the best deal available to you.