If you have a VA mortgage -- the IRRRL
If you're a veteran with a VA loan, refinancing is super-easy – even if your home’s value has decreased. Even if your income has dropped.Even if your credit rating has crashed.Even if you’d like to pay for energy-efficient home improvements with your refinance. The mortgage that gets it done is called an Interest Rate Reduction Refinancing Loan, or IRRRL.
What do you need for a VA-to-VA refinance?
First, you need to complete an occupancy certification. You’re allowed to refinance a second home or rental – as long as it was your primary residence when you got your original VA home loan. All you have to do is certify that you occupy or used to occupy the home as your primary residence.
If you have a second mortgage, you need to get the second mortgage subordinated to the new loan. Your escrow company should be able to take care of this for you.
Finally, you need to benefit from your refinance. The principal and interest payment on an IRRRL must be less than the principal and interest payment on the loan being refinanced unless one of the following exceptions applies:
- the IRRRL is refinancing an ARM
- term of the IRRRL is shorter than the term of the loan being refinanced, or
- energy efficiency improvements are included in the IRRRL.
A significant increase in the veteran’s monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:
- financing of closing costs
- financing of up to two discount points, financing of the funding fee, and/or
- higher interest rate when an ARM is being refinanced.
A significant payment increase triggers additional underwriting. If the monthly payment (PITI) increases by 20 percent or more, the lender must certify that your income is enough to qualify you for the new payment.
Finding your VA refinance lender
It’s very important that you understand that VA mortgage rates are not set by the government. It’s also critical that you know that you can go to almost any licensed lender for your refinance – not just the one you’re with now. The VA even put a warning about this on its Web site – it says that some mortgage lenders may try to tell you that only they are approved to refinance your loan; that's not true. In fact, even lenders not approved to do VA loans can approve IRRRLs. Do yourself a favor and get several mortgage quotes and make your best deal.
Finally, you need to compare fees. The VA has reported that some lenders have told borrowers that certain fees are required by the government. In fact, the only required fee is the funding fee. Other lender charges may apply but are imposed at the lender's discretion.
As with other mortgage transactions, you may be charged fees by third parties that provide services like escrow and appraisals. You’ll have to buy title insurance, but you’re allowed to shop for a low-cost provider. You may be eligible for a discount if you’re a member of certain professions, a senior citizen, or fall into other special classifications, so ask and compare. You may be offered a bundled rate if you combine policies or a less-expensive policy (called a short rate) if your current mortgage is less than five years old, so ask. The VA limits the loan origination fee (or combination of lender-imposed fees like processing, underwriting, document preparation, etc.) to 1% of the loan amount.
You are not required to pay your VA refinance costs out of pocket (although you can choose to do so); instead, you can add them to your loan amount. Your maximum loan amount is calculated by taking your VA loan balance plus allowable fees and charges, including a maximum of two discount points and your funding fee.
If you want to finance allowable energy-efficient improvements (up to $6,000),you can include them in your refinance amount as well.Allowable energy improvements must have been completed within 90 days preceding the funding of the loan for you to be reimbursed.
You aren't allowed to take cash out with an IRRRL, but if you’re refinancing a loan that’s 30 days or more past due (which must be submitted for prior approval), you’ll be able to include past due payments, late fees, and reasonable legal costs.
What's NOT required to get approved for a VA-to-VA refinance?
As long as you are current on your VA mortgage, you aren't required to have good credit to get your IRRL approved. There is no credit underwriting performed unless your payment will increase by 20 percent or more (if, for example, you were to refinance from a 30-year mortgage to a 15-year home loan) or you are more than 30 days behind on your current home loan. If you have an active Chapter 13 bankruptcy, your new refinance may have to be approved by the bankruptcy trustee or judge.
You don't need an appraisal. This can be a boon to those whose homes have lost value and who would otherwise not qualify for a mortgage refinance. You don't need to document your income. In fact, you don't even need a job.
You don't need your certificate of eligibility either. Your lender may use the VA's automated Prior Loa VAlidation procedure for an interest-rate-reduction refinance, or you could bring in your certificate if you have it.
Why is it so easy?
Refinancing your VA loan is so easy because the VA is already guaranteeing your loan. Allowing you to refinance -- even if your credit has tanked, your mortgage is underwater or you're unemployed -- can only make it easier for you to make your mortgage payments and perhaps lessen your chances of ending up in default.
If you are eligible for a VA home loan but have a conventional mortgage, you probably had good reason for choosing the non-VA loan, such as:
- You needed a sub-prime mortgage
- You couldn't properly document your income
- You had a down payment and chose to avoid the VA funding fee
- You wanted a Pay Option ARM, interest-only mortgage or other exotic loan
- Your home's price exceeded the VA limits
- Your condo was not VA-approved
Today, however, it may be to your advantage to refinance to a VA mortgage if you qualify. If you have improved your credit, been self-employed long enough for your income to be counted, if your condo has obtained VA approval, or if you can get a better interest rate with VA financing, it's time to think about making the switch. You can begin by running some numbers through a refinance calculator, which can give you an idea of what your potential savings will be.
VA loans can be better for those with less equity
"With the drop in property values over the past four or five years, borrowers who had 20 percent equity or more are now in a situation where they have no equity," says Storm. "Some are in 5-year ARMs and would like to refinance into a 30-year fixed loan. Some have a second mortgage or equity line and would like to combine the first and second into a new 30-year fixed mortgage. But without 20 percent equity they are not able to get into a low [-rate] conventional 30-year fixed loan without paying mortgage insurance. VA rates are low--in many cases lower than conventional rates--especially since VA does not have as many pricing adjustments for property type, FICO, LTV, etc."
Refinance your subprime loan to VA
The Veterans' Benefits Improvement Act of 2008 made it possible for veterans to refinance up to 100 percent of their homes' value, an increase over the previous limit of 90 percent. One reason for implementing this change was to "allow VA to assist a substantial number of veterans with subprime mortgages to refinance into a safer, more affordable, VA guaranteed loan," said Secretary of Veterans Affairs Dr. James B. Peake in a 2008 press release. "Veterans in financial distress due to high rate subprime mortgages are potentially the greatest beneficiaries," he said.
How good does your credit have to be?
The VA's underwriting guidelines state, "In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item."
So if you have made all of your required payments on time for a year, you have a decent chance of getting a refinance approved. If you are in a debt management plan, you may be considered for a VA refinance after 12 consecutive on-time payments have been made to the plan.
If two years have passed since a Chapter 7 bankruptcy or a foreclosure, it can be disregarded. This may be possible after one year if you have successfully reestablished credit and the bankruptcy was caused by circumstances such as unemployment or illness. You can refinance while in a Chapter 13 plan if you have made 12 payments on time and the trustee approves.
You have to prove your income
You have to prove your income for a VA refinance. You salary is counted if the underwriter determines that your employment is likely to continue. Overtime, bonuses, commissions, and second-job income only count once you have a two-year history of receiving such income. Self-employment income counts once you have been in business for at least two years. That said, you should still talk to a loan professional. Just because your income was insufficient or unverifiable the last time you applied for a loan doesn't mean it is now.
Condos must be approved
Due to the recent popularity of FHA financing, many condominium projects have made the effort to get approved with HUD in order to attract more buyers. The VA accepts condos approved by FHA prior to December 7, 2009. After that date, the condo association has to get approved by the VA. You can find VA-approved condos and FHA-approved condos online.
VA refinance versus HARP
If you have little home equity and your first mortgage is with Fannie Mae or Freddie Mac, you may want to consider refinancing through the Home Affordable Refinance Program (HARP). HARP has been improved and borrowers are finding it easier to accomplish a rate-reducing refinance. You’ll want to compare the risk-based pricing adjustments (which can be as high as 2 percent of the loan amount), with the VA’s funding fee. Here's a little comparison between the particulars of what HARP offers versus what VA refinances offer:
Exercise your right to a VA loan
Studies show only one fifth of those who are eligible for VA mortgages don’t even know the program exists. That may be a communication problem – there is nothing on a standard mortgage application that requests your veteran status. Another issue is that not all lenders are equipped to originate VA loans, so it may not be offered. If you're thinking about refinancing, check with an approved VA lender when you shop for your home loan. It might be the best choice for your next refinance.