Refinancing a VA home loan is an option available to borrowers in two basic ways: cash-out refinancing and Interest Rate Reduction Refinancing Loans, also known as the VA IRRRL or VA Streamline loan.
These two types of VA refinancing loans are very different. Which one is most appropriate depends on the borrower’s circumstances and financial needs.
One basic difference between the cash-out refinancing loan and the VA Interest Rate Reduction Refinancing Loan is occupancy--VA loan rules for occupancy apply for cash-out refinancing, but VA IRRRLs require only that the borrower certify he or she previously used the home as the primary residence during the original VA loan.
VA IRRRLs do not require a new loan application, according to VA loan rules, unless certain circumstances are met. Those include the following statements from Chapter Six of the VA Lender’s Handbook:
“No credit information or underwriting is required unless:
· the loan to be refinanced is 30 days or more past due (see section 2 of this chapter) or,
· the monthly payment (PITI) will increase 20 percent or more.”
The VA adds that any borrower with a Chapter 13 bankruptcy “may need approval of the trustee for the new loan.”
VA Cash-Out Refinancing loans are quite different. These loans always require a new application, credit check and other underwriting. This is due in part because the borrower can take cash out on the loan. The original mortgage is paid off by the new loan and any amount of money left over may be taken in cash.
IRRRL borrowers cannot do this; the primary function of a VA IRRRL is to lower the borrower’s interest rates and/or monthly payments.
It should be mentioned that VA loan rules for these types of refinancing are the baseline. Just because a VA IRRRL does not require a new application or underwriting under the VA loan rules does not mean the lender can’t (or won’t) require a credit check or application data. Cash-out refinancing always requires an appraisal; VA loan rules for IRRRLS say no appraisal is required. Again, the lender may require one for an IRRRL anyway and is free to do so.
These two types of refinancing loans differ in other important ways. For cash-out loans, VA loan rules state, “The veteran must have sufficient available entitlement for the loan. If an existing VA loan on the same property will be paid off by the refinancing loan, the entitlement used for that existing loan can be restored for purposes of obtaining the new loan.”
For VA IRRRLs, the entitlement rules are much different. “No additional charge is made to the veteran’s entitlement for an IRRRL; such as, the amount of the veteran’s previously used and available entitlement remains the same before and after obtaining the IRRRL.
The new IRRRL loan amount may be equal to, greater than, or less than, the original amount of the loan being refinanced. This may impact the amount of guaranty on the new loan, but not the veteran’s use of entitlement.”
For both cash-out loans and VA IRRRLs, there is a VA loan funding fee which must be paid (except by qualified veterans who are exempt due to service-connected disability). In both cases the VA loan funding fee may be included in the loan amount.