Veterans have the benefit of securing 100% financing for a home purchase. They also have the benefit of the streamlined refinance program once they have a VA loan. In order to qualify for a VA IRRRL, you must have timely mortgage payments and have a net tangible benefit for the refinance. Many people believe this means only a better interest rate.
Luckily, there are other ways you can get approved for the VA Interest Rate Reduction Refinance Loan. Even though the name suggests it’s meant to lower your interest rate, veterans have secured approval for many other reasons.
The Most Common Reason is a Lower Interest Rate
The VA IRRRL program does help borrowers lower their payment. It’s often the most common net tangible benefit. With a lower interest rate, most veterans secure a lower monthly payment. The monthly savings are then the net tangible benefit they need for approval.
Typically, when borrowers with any type of loan refinance it, they do so to get the lower payment. Whether interest rates were high when they originally bought the home or they didn’t qualify for a lower rate at the time, circumstances can change. Interest rates can decrease, and a borrower’s credit can improve. Both circumstances make it easier to qualify for a lower rate in the future.
The Exceptions to the Lower Interest Rate
Just because a lower interest rate is the ‘normal’ benefit for the VA IRRRL, it’s not the only reason. Sometimes, a borrower’s interest rate or payment doesn’t decrease. A few examples include:
- Refinancing out of an adjustable-rate mortgage into a fixed-rate mortgage – ARM rates are often much lower than fixed interest rates during the introductory period. If a borrower refinances out of the ARM, he may have to take a slightly higher fixed interest rate. This could cause his payment to increase. Lenders and the VA view this as less risky though because a fixed rate never changes but an ARM can adjust.
- Refinancing into a lower term – Lowering your term is considered another net tangible benefit. The bank gets its money back faster, and you get a lower interest rate for taking the shorter term. It’s a win-win for everyone. You should know, though, that your payment will be higher as a result of the shorter term since you will have to pay the principal off faster.
Watch Your Payment Increase
Despite the fact that the VA allows borrowers to use the VA IRRRL program even if their payment increases, there is one strict rule. The payment cannot increase more than 20% in order to use the no-verification program.
If your payment increases more than 20% as a result of the higher interest rate on the fixed-rate or the higher principal payment on the shorter term, you will have to use the fully verified VA refinance. In other words, the lender will have to verify your income, assets, credit score, and the home’s value. The VA uses the 20% threshold as they feel that anything beyond a 20% increase can become unaffordable if your circumstances changed.
The Other Qualifying Factor
There is only one other qualifying factor you must meet in order to qualify for the VA IRRRL. You must have a timely mortgage payment history. Generally, this means 12 on-time payments for the last month. Some lenders will allow an exception of one 30-day late payment during that time. If you have had your VA loan for less than 12 months, though, you cannot have any late payments in order to qualify.
Is it Worth it?
The bigger question is whether it’s worth it for you to refinance. If your payment increases, you’ll have to give it careful thought. Look at the total interest cost over the life of the loan. Do you save a significant amount of money at the end of the term? If so, it could be worth refinancing. If the savings aren’t there, you may want to consider other options.
You should also watch the closing costs. You’ll pay standard closing costs plus a 0.5% funding fee for the VA IRRRL. Make sure you shop around with different lenders to find the lowest closing costs. If you plan to wrap the costs and the funding fee into your loan, again, make sure the cost is worth it in the end. This will increase the total interest paid over the life of the loan.
The VA IRRRL is available to any veteran with a VA loan that is current and when the veteran has a net tangible benefit. It doesn’t just mean lower interest rates, although that definitely helps the situation. Talk with several lenders to find out which program would suit you the most.Click to See the Latest Mortgage Rates»