Understanding IRRRL Closing Costs
What are the Closing Costs on an IRRRL?
Here at Low VA Rates we often get the question, are there IRRRL closing costs? Unfortunately, the bad news is that there are closing costs when it comes to refinancing your home. However, as we’ll explain in a bit, the source of that misconception is actually one of the things that make the VA streamline refinance program such a great deal for the borrower. Any time you work through a lender to obtain a loan, there will be closing costs, whether you have to pay them or the seller offers to pay them for you. In the case of a VA streamline, or IRRRL, there is no seller, so you will definitely have to pay the closing costs on your new loan. However, that’s where the bad news ends. Everything else is good news – both in the things that can be included in closing costs and your options for paying closing costs.
What Closing Costs Can Be Added to a VA IRRRL?
The VA lender’s handbook says that, in regards to IRRRLs, closing costs can include the VA funding fee (unless you are exempt – most borrowers are not, but speak with a VA-approved loan officer to find out if you are), and “any allowable fees and charges…including the lender’s flat charge”. These allowable fees and charges are listed in our “Are there Closing Costs on a VA Loan?” post. While the lender is allowed to charge for any of the things on that list if they are provided, not all of them are required on an IRRRL. For example, an official VA appraisal of the home is not required in an IRRRL, and therefore you won’t be charged for it. Also, your income and employment do not need to be evaluated and verified again, so there should not appear any charges for those things. All in all, the simplified, streamlined process of the VA IRRRL actually makes it cheaper as well. But hey, we’re not done with the good news yet.
Not only will the charge for closing costs be smaller on an IRRRL than for a standard refinance or new purchase loan, but you can actually finance every dime of closing costs on an IRRRL into the new loan. In other words, you can get an IRRRL with truly no money down whatsoever. The VA instituted this policy in order to open up the benefits of the IRRRL to more veterans – especially the ones who need it most. Since those who are in the most need of better mortgage terms also often do not have very much money saved to cover closing costs, those closing costs can be a very real barrier to a veteran improving their financial situation. The VA recognizes this and has done their best to make the benefits of the IRRRL available to as many veterans as possible.
But wait, there’s more… The VA will also allow you to purchase and finance two discount points into the loan amount. Buying discount points from the lender means you pay the lender a certain amount of cash in exchange for a lower interest rate. If you want to understand discount points better, give a VA-approved lender a call and ask them your questions. They will be able to explain it better in context than we can here. You can purchase more than two discount points on an IRRRL, but you can only roll the cost of two into the loan amount. Allowing you to roll discount points into the loan amount at all is extremely generous, and stopping it at two protects the lenders from shouldering too much risk without enough return. The VA does its best to make its loan program attractive to both borrowers and lenders.
How to Calculate Closing Costs on a VA IRRRL
A word of caution: it is wonderful to be able to roll closing costs into the loan amount. However, remember that if you don’t pay them upfront, you are going to be charged interest on them right along with the rest of the loan. An extra $5k-10k on your mortgage may not seem like much, but the effect it has on your amortization schedule and the total amount of interest paid can be unpleasant. If you have the ability to pay your closing costs upfront without putting yourself in too much of a tight spot, it is usually the best call to do so. Just like paying cash for a house saves you money in interest vs. financing it with a lender, paying cash for your closing costs instead of financing them also saves you money.
For your reference, here is the relevant portion in the VA Lender’s Handbook about closing costs on an IRRRL:
The following fees and charges may be included in an IRRRL:
- the VA funding fee, and
- any allowable fees and charges discussed in section 2 of chapter 8; such as all allowable closing costs, including the lender’s flat charge.
While the borrower may pay any reasonable amount of discount points in cash, only up to two discount points can be included in the loan amount.
Although VA does not require an appraisal or credit underwriting on IRRRLs, any customary and reasonable credit report or appraisal expense incurred by a lender to satisfy its lending requirements may be charged to the borrower and included in the loan.
The lender may also set the interest rate on the new loan high enough to enable the lender to pay all closing costs, as long as the requirements for lower interest rate and payments (or one of the exceptions to those requirements) are met.
For IRRRLs to refinance loans 30 days or more past due (which must be submitted for prior approval), the following can be included in the new loan:
- late payments and late charges on the old loan, and
- reasonable costs if legal action to terminate the old loan has commenced.