The IRRRL usually does not require a credit check, income/asset documents or an appraisal. There are exceptions that may require some of these items. However, if the borrower goes back to the lender that currently has the existing VA mortgage, these items are typically not needed to complete the refinance. The reason these items are not required is simple. The VA is already on the hook to provide a loan guarantee to the lender at the existing loan at the higher interest rate.
This means if the borrower defaults on the mortgage, the VA will cover a portion of the loss the lender incurs. The VA figures that if the borrower is making their payment at the current rate it is reasonable to expect the borrower will make the payment with a lower rate and therefore smaller mortgage payment. This reduction in interest rate and therefore mortgage payment for the borrower should reduce the risk exposure to the VA.
As with most any mortgage, a IRRRL requires closing costs and pre-paids to be collected at closing. The IRRRL allows the borrower to roll these costs into the new mortgage so the veteran does not have to come up with any money out of pocket. Examples of some of the costs on the IRRRL are:
1. VA funding fee is 0.50% of the new loan (unless the veteran is exempt)
2. State/county taxes may be required
3. Title insurance must be updated
4. Setting up the escrows for the real estate taxes and insurance
5. Per diem interest from the closing date to the end of the month
Even though there are closing costs, the costs are less than a traditional mortgage. Since no appraisal is required in most cases, there is no appraisal fee to pay. The same is true for the cost of a credit report. Other fees may be waived for a IRRRL depending on your lender.
In today’s real estate market, with many homes losing value, this is a real benefit to the veteran since the IRRRL may not be subject to an appraisal. This means even if the home is worth less than is being borrowed, the veteran can still reduce the interest rate on the mortgage thereby saving money each month. This helps the overall market because it provides an incentive for the veteran to stay in the home and wait for the value to start appreciating again due to the new monthly savings.
Another benefit of the IRRRL is that the borrower will be able to skip at least one month’s payment while transitioning from the existing mortgage to the new mortgage. This is because mortgage payments are made in arrears. This means the borrower uses the money and then pays the interest. For instance, the May payment pays April’s interest. So if you close on June 15th, the payoff of the existing mortgage includes the interest from June 1st until the 15th and then the per diem interest from the 15th to the end of the month is collected at closing. With this example, the first payment on the new loan would be due August 1st so there was no July payment required.
Many veterans may be aware of the streamline refinance, however most don’t realize that you do not have to occupy the home to be eligible for this loan. If the veteran purchased the home using his/her VA benefit, occupied the home after purchase and moved but retained the home as a rental, the IRRRL is still available as long as the mortgage is current. This is the rare exception to the VA guidelines that allow a veteran to use his/her VA eligibility on an investment property.
The streamline refinance or IRRRL is a true benefit of our service members, either active or inactive. If you have a VA mortgage or know someone who does, this loan program is worth exploring. It may result in significant monthly savings and a lower interest rate.
Craig Weeks has been in the mortgage business for over 22 years. He specializes in government loans, including FHA and VA. He works for a major bank that currently has about a 25% national market share of mortgages.
