VA Loan Refinancing Rules for IRRRLs

What is a VA Interest Rate Reduction Refinancing Loan? According to Chapter Six of the VA Lender’s Handbook, this type of refinancing is, “a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan.” No cash may be issued on a VA IRRRL; these refinancing loans do not permit cash back to the borrower.

The general rules for VA IRRRLs includes a no-appraisal feature, a no-credit check feature, and according to the VA, any lender may close an IRRRL automatically with no “prior approval” needed from the Department of Veterans Affairs. VA IRRRLs do not use the borrower’s VA loan entitlement, so no restoration of previously used VA loan entitlement is required for the purpose of getting a VA IRRRL approved.

These are general guidelines. There are cases where a credit check and an appraisal may be required by the lender or by the terms of VA IRRRL requirements.

Basic Rules For VA IRRRLs

An IRRRL is made for an existing VA mortgage. This mortgage can be a fixed rate loan, a hybrid Adjustable Rate Mortgage (ARM) or traditional ARM loan. VA loan rules for this type of refinancing require the new loan to offer “a lower interest rate than the loan it is refinancing unless the loan it is refinancing is an ARM”.

In the same way the IRRRL rules require a lower interest rate, there are also requirements for lower payments. According to the VA, “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.”

The VA loan rules are written in such a way to recognize that not all borrower circumstances or needs are identical. If a borrower refinances with one of the above situations, the new loan may result in an increase in the monthly mortgage payments. This can be complicated of the borrower finances closing costs, discount points, or the VA Loan Funding Fee.

This does not bar the VA loan applicant from applying for the refinancing loan, but the VA does have requirements in the event that the monthly payments increase by a specified amount.

VA Loan Rules When An IRRRL Increases the Monthly Payment By 20% Or More

The VA Lender’s Handbook states that in cases where the new loan increases the mortgage obligation by 20 percent or more, the lender is required to “determine that the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable, and include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.”

As you can see, IRRRLs can be a bit complex, but they are definitely worth the effort, especially when a borrower needs to decrease monthly mortgage payments and interest rates to better afford his or her home.

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