Tips & Special Topics
The Facts About Refinancing VA Home Loans
Similar to any other mortgage or home loan, it is possible to refinance your VA home loan also. Such a loan is known as an IRRL i.e. Interest Rate Reduction Loan. It is also referred to by other names such as a Streamline loan or a VA to VA. This is a loan to an eligible applicant guaranteed by the VA to refinance a preexisting VA guaranteed loan.
The unique feature in this type of refinancing is that the rate of interest and the principal and interest payments on the refinance loan are lower than that of the original loan. However there are a few exceptions. In the following cases, there is a possibility that the rate of interest may rise
- A VA adjustable rate mortgage (ARM) is refinanced as a fixed rate loan.
- The IRRL is repayable over a period shorter than that of the loan being refinanced.
- Costs of Energy efficiency improvements are also covered in the VA Streamline.
Although it is required that the monthly principal and interest payment of an VA Home Loan Refinance be less than what the applicant was required to pay on the loan being refinanced, in certain situations this payment can be greater, especially where such a VA Streamline Refinance
- Includes financing for closing costs
- Includes financing for discount points (Only up to 2 discount points allowed)
- Includes financing for the funding fee (0.5% on VA Streamlines)
- The VA Streamline is for refinancing a VA ARM to a fixed rate loan.
The amount of an VA Home Loan Refinance cannot exceed the outstanding balance on VA loan being refinanced plus permissible costs like closing costs, funding fee etc and up to $6000 as energy improvement costs (for such improvements completed within a period of ninety days prior to the date of loan closing). Adding the permissible costs can result in a situation where the
VA Refinance Home Loan amount ends up being more than the fair market value of the property; and can dilute the cash flow benefit from a refinance.
The VA does not require any certificate of eligibility or credit underwriting package for the refinance. No appraisal is required. It relies on the lender; in part. So, since a VA Refinance Home Loan is underwritten by a VA-approved commercial lender, the lender may have conditions to approval, such as requiring an appraisal and/or a credit report.
The IRRL application must be accompanied by a statement signed by the applicant/veteran containing an acknowledgement of the effects on rates of interest and monthly loan payments caused by the IRRL. The statement must reflect both the old and the new interest rates and monthly payments. If the monthly payments of principal, interest, taxes and insurance (PITI) increase by over 20%, the lender is required by VA to include the lender’s certificate that the borrower (veteran) qualifies. The veteran borrower can append his/her statement to the lender’s certificate, instead of giving it separately.
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VA Streamline Refinance is possible only if the veteran has used his VA entitlement on the property proposed to be refinanced. If the VA Streamline Refinance is approved, it will reuse the veteran's original entitlement for the refinance. However, since it is a new loan, a new VA case number is obtained through the VA assignment system.
The applicant’s entitlement and use of entitlement for the VA Refinance Home Loan remains the same as for the loan being refinanced regardless of the size of the VA Streamline Refinance i.e. whether it is larger, equal to or smaller than the existing loan. The issue of entitlement is important because usually lenders approve NO DOWN PAYMENT VA loans, which includes VA Streamlines, in a principal amount up to four times the amount of an applicant’s entitlement.
