Mortgage rates have fallen to near historic lows, giving millions of homeowners a shot at saving money by refinancing. For VA home loan borrowers, the VA Interest Rate Reduction Refinancing Loan (IRRRL) is designed to help borrowers lower rates, which can shave off thousands from the total loan amount.
“The VA IRRRL is an ideal option for someone whose current VA loan has a higher rate than what is currently available. If you’ve made progress on the principal of your loan, refinancing can also help you save money in your monthly budget or it can allow you to pay off your loan quicker,” says Mounia Rdaouni, assistant vice president of mortgage operations at Navy Federal Credit Union.
What you need to be eligible for a VA IRRRL
Flexibility is the hallmark of the VA IRRRL, says Rdaouni. Borrowers who want to apply for a VA IRRRL don’t have to supply a ton of paperwork or even an appraisal, which saves both time and money.
The three main requirements are:
- The borrower is using the IRRRL to refinance an existing VA loan
- The loan is 210 days old (often called “seasoning”)
- The home is currently or was once occupied by the borrower
You might need to provide the certificate of eligibility (COE) you used to apply for your original VA loan as part of the application process. The COE is also available digitally through the VA Home Loan program portal.
For homeowners who have a second mortgage, that lender must agree to make the new VA loan the first mortgage.
There are no credit underwriting requirements for VA IRRRLs, though some lenders might set their own minimum credit scores, says Adam Spigelman, vice president at Planet Home Lending. For borrowers who have an average to low credit score, there are lenders who are willing to evaluate loans on a case-by-case basis.
“Look for a home lender that does old-fashioned manual underwriting. That means you have a human underwriter looking at your individual credit situation rather than using software,” says Spigelman. “The service members who usually benefit from manual underwriting typically have a reason for their credit blemishes, like a medical crisis, and some factors that compensate, like extra income.”
Borrower fees for VA IRRRLs
Compared with other VA refinance products, the VA funding fees associated with IRRRLs are typically lower, says Rdaouni. The VA charges a funding fee of 0.5 percent as opposed to a 3.3 percent for other VA refinance loans.
Some borrowers are exempt from these funding fees. Veterans who were injured while serving and receive compensation for their disability as well as those who are entitled, but never received, disability compensation don’t have to pay the funding fee. Spouses of vets who died in service or because of a service-related incident are also exempt from paying the funding fee.
Borrowers who paid the fee, but are eligible for exemption, could receive a refund. This includes folks who had a disability claim pending during the loan process and were later approved for disability. If the disability claim succeeded the loan closing, then you might be able to get your funding fee reimbursed. To request a refund, contact your lender or the VA Regional Loan Center at 877-827-3702.
The funding fee can be rolled into the mortgage, if borrowers don’t want to or can’t pay the fees up front. However, by law, the fees must be paid within 36 months of originating the loan. By adding the fees to your loan, your monthly payments will be higher.
Reducing your interest rate can help you save money
As part of the The Protecting Veterans From Predatory Lending Act of 2018, there are certain requirements lenders must meet. This includes minimum rate reductions, which is one of the main benefits of refinancing.
For borrowers who already have a VA loan with a fixed interest rate, the new loan must have an interest rate of at least 50 basis points less than the previous loan. This is what they call a net tangible benefit.
Similarly, if the VA loan goes from a fixed rate to an adjustable rate, or ARM, that new refinanced loan must be at least 200 basis points less than the original loan.
Keep in mind, even if you lower your interest rate, you can wind up paying more if you extend the length of your loan. For example, if you’ve paid down five years of a 30-year mortgage and refinance that mortgage you might not want to go back to a 30-year term – which increases the amount of interest you pay, in total. You can reduce the terms, so that you refinance into a 25-year mortgage with the lower rate — this way you ensure that you’re saving money on your loan.
Keep in mind that many lenders have set terms, so you might not be able to customize how long you want the loan for. For example, someone who has 27 years left on their loan, might need to choose shorter terms like 25 years or face resetting back to the popular 30-year mortgage.
Although interest rates are low, be sure you do the math and talk with your lender before you refinance, says Rdaouni.
Tools like Bankrate’s mortgage rate calculator can help you see what your new payments would look like using a lower interest rate and different terms. It will also help you figure out how much your monthly mortgage payments will be using these variables to see how it factors with your goals and budget.
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- VA home loans: Everything America’s military veterans need to know