If you have a current VA loan, you may be eligible to refinance with the VA IRRRL. This means refinancing with no verification of your credit, income, assets, or home value. What’s the catch? You need a ‘net tangible benefit.’ In other words, there needs to be incentive for the VA to allow you to refinance without re-qualifying for the program.
What is a ‘Net Tangible Benefit’?
There are many ways you can show a ‘net tangible benefit.’ In the loosest sense of the term, it means you save money by refinancing. It doesn’t have to be this way, though. Yes, a lower payment is definitely a benefit and an easy way to qualify for the loan. But, there are also other ways.
Another popular way to achieve the benefit is with risk reduction. Let’s say you have an adjustable rate loan right now. If you keep it and let it adjust, your payment could increase significantly. This is a risk to you and the lender. If you can’t afford the new payment, you could default on your loan. If you refinance from an ARM to a fixed-rate, though, you reduce the risk and this is a benefit.
Another form of a risk reduction benefit is when you refinance from a longer term into a shorter term. For example, if you have a 30-year term now, but you use the VA IRRRL to secure a 15-year term, you save money. Yes, your payment increases, but you cut out thousands of dollars in interest by paying the loan off in half of the time.
Why the VA Cares About Net Tangible Benefit
The VA requires very little verification when you use the VA IRRRL program. They base their decision on your mortgage payment history and the ‘net tangible benefit.’
As far as your mortgage payment history, the lender must evaluate your payments over the last 12 months. During that time, all payments must be made on time. The VA does allow the exception of one 30-day late payment in that time, but it cannot be within the last three months.
Aside from the mortgage payment history, the lender does not have to verify your income, assets, credit score, or home value. Since the mortgage payment history isn’t enough to rely on, the lender must also determine the benefit of the loan.
What do Lenders Require?
The bigger question you may want to know is what lenders require. The VA does not require them to pull your credit, verify employment or income or even order an appraisal. This doesn’t mean a lender will not do these things, though. It depends on the risk you pose.
For example, if you have a payment reduction benefit, chances are lenders will allow you to refinance with a perfect mortgage payment history. The lender does not have to take a lot of risk since the payment is lower and you have a track record of making your payments on time.
However, a borrower refinancing from an ARM to a fixed rate loan may pose a slightly higher risk. First, the payment may be slightly higher. ARM rates are often lower than fixed loan rates. They offer a ‘teaser’ rate that then adjusts after the initial period. If you refinance out of that ‘teaser’ rate, chances are you will experience a payment increase. The VA does not require lenders to verify your income or debt ratio unless that payment increases more than 20%. Some lenders may be a little more hesitant to write this type of loan.
A similar situation occurs with a borrower that refinances from a 30-year to a shorter term. While it is a lower risk, the higher payment could be harder to afford. Again, the VA only requires lenders to verify your income if the payment increases more than 20%. Lenders, however, may require that you verify your income and/or liabilities to make sure you truly can afford the higher payment.
The bottom line is that it comes down to your circumstances and the lender’s requirements. You have some workaround with the lender, though, as you are free to go to any lender that is available. Shopping around not only finds you a lender that will approve your loan, but also one that offers the best rates and closing costs.