If you have a VA home loan already but believe you could qualify for a lower VA loan rate now, an Interest Rate Reduction Refinance Loan (IRRRL) from the VA could help. This type of VA loan makes it easy to expedite the refinance of an existing VA loan into a new VA loan product with better terms and, typically, a lower APR.
Just remember that a VA IRRRL only works for existing VA loans, and that you’ll need another VA loan product if you want to refinance any other type of a home loan into a VA loan. Also note that regular VA loan requirements apply in terms of the required military service involved.
Generally speaking, you are eligible for a VA home loan if you have completed 90 days of active duty military service during a named conflict, six years of service in the National Guard or Reserves or 181 consecutive days of active duty during a period of relative peace. However, you may also be eligible for a VA loan if you are married to a servicemember who died in the line of duty or as a result of a service-related disability.
You’ll also need a Certificate of Eligibility (COE) from the VA to start the process, which you can apply for online with the VA or through your lender.
How does the Interest Rate Reduction Refinance Loan (IRRRL) work?
The IRRRL, also known as the VA refinance, makes refinancing into a new VA loan much easier than other methods. This loan doesn’t require an appraisal or a credit underwriting package, meaning you can still get approved even if your credit score or financial situation has worsened since you initially took out a VA home loan.
This type of loan also lets you wrap your closing costs and VA funding fee into the new loan product, which can help you facilitate the refinance without paying anything out of pocket upfront.
Starting in January 2020, the VA stopped capping the amount of money veterans can borrow with a VA loan with no money down. Note, however, that lenders still set the main criteria for VA loans, and they will enact their own borrowing limits based on your income and other factors.
Another key point: The VA IRRRL doesn’t charge any private mortgage insurance (PMI) regardless of how much home equity you have, but this is true of all VA loans anyway. Instead, VA loans come with a VA funding fee that is paid upfront in the closing costs of your home.
Note that you may not have to pay a VA funding fee in some circumstances, including if you’re a veteran receiving VA compensation for a service-connected disability, “a veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay,” or the surviving spouse of a veteran who died in service or as the result of a service-connected disability, reports the VA.
Either way, you should note that the funding fee for the VA streamline refinance is only 0.50% of your loan amount, which is considerably less than you would pay for a VA loan for a home purchase or new construction. This lower fee is good for the first time you take advantage of the IRRRL, as well as any subsequent times you refinance your VA loan with this type of loan.
Pros and cons of the VA streamline refinance
There are many advantages that come with the IRRRL, and there are also a handful of downsides. The most important pros and cons you should know about include:
- No appraisal or credit underwriting required. You may get approved for an IRRRL regardless of whether your income has gone down, your credit score has dropped or your home’s value has tanked. The IRRRL expedites your loan application without any underwriting, minimum credit score or income or appraisal required.
- Wrap your closing costs in your loan. The closing costs on an IRRRL tend to be lower anyway, including the discounted funding fee, but you can wrap all your expenses in your new loan amount. This means you can refinance your home without any upfront, out-of-pocket costs.
- Secure a lower interest rate. The IRRRL lets you qualify for a lower interest rate if one is available. This can mean paying a lower amount of interest over the life of your loan, a lower monthly payment or both.
- You only have to prove previous occupancy of the home. Unlike VA purchase loans, the IRRRL doesn’t force you to occupy the residence as your primary home. This loan only requires you to prove you lived there in the past, so it could pave the way to maintaining your VA loan benefit for a rental home or second home.
- You cannot take cash out of your home. Unlike the VA cash-out refinance, the IRRRL doesn’t allow you to receive any cash proceeds during the loan process. This is a major downside if you have a lot of home equity and you want to use it to pay down debt, pay for home improvements or reach another financial goal.
- The IRRRL only works for existing VA loans. You cannot use the IRRRL to refinance a conventional mortgage, an FHA loan or any other type of home loan.
- Lenders can set their own guidelines for approval. While the VA states the IRRRL doesn’t have any underwriting or credit requirements, individual lenders aren’t required to offer this type of loan. Even lenders who do can set their own requirements, and those may make it harder to get approved. With Veterans United, for example, you cannot have any late payments of 30 days or longer within the last 12 months on the loan being refinanced.
- The IRRRL only works for your original VA loan. If you have a second mortgage, you cannot wrap that loan into your IRRRL. Further, “the holder must agree to subordinate that lien so that your new VA loan will be a first mortgage,” according to the VA.
The bottom line
If you want to apply for an IRRRL, your best bet is reaching out to several different lenders who offer VA loans. Meanwhile, you should use a VA loan calculator to see how much your new payment might be.
A VA streamline refinance can help you secure a lower interest rate, lower your monthly mortgage payment or both, but it’s up to you to research your options and take steps to start the process.