Deciphering the VA Lender’s Handbook Chapter 6 Part 2
In the last article, we started talking about the Interest Rate Reduction Refinancing Loan (IRRRL) option that the VA offers. The IRRRL is a streamline refinance option with many benefits. The last article covered the definition, purpose, and scope of the IRRRL and finished up by mentioning the veteran’s statement and lender’s certification that are required as part of the IRRRL process. This article will pick up where the last left off by explaining what the veteran’s statement and lender’s certification are, then by going into detail about what closing costs can be rolled into an IRRRL and what costs cannot.
For every IRRRL that is closed, the veteran is required to sign a statement that they acknowledge what effect the refinance will have on their loan payments, loan terms, and interest rate. These effects are very important for the veteran to understand to make sure that he or she is achieving the goals that he or she was wanting to achieve with the IRRRL. The statement that the veteran signs must show clearly the new interest rate and new monthly payments and also the old interest rate and monthly payments, as well as a calculation of how long it will take to recoup all of the closing costs (this assumes a lower overall monthly payment with the new loan; if you’re saving $150/month on a lower monthly payment, it would take 3 years and 4 months to recoup $6,000 of closing costs).
On the occasion that the monthly payment increases by more than 20% due to the IRRRL, the lender must include a certification that the borrower is still qualified for the loan. This makes perfect sense; many borrowers are qualified for a $1,000 monthly payment but not a $1,200 monthly payment. In these cases, expect that the lender will take the time to make sure you are qualified for the new loan amount. Typically, there is still noticeably less underwriting involved than in a regular refinance. The lender is required to use their official letterhead for both the veteran’s statement and the lender’s certification. The lender will prepare the veteran’s statement and the veteran simply needs to sign it. Take the opportunity to view the statement and make sure that everything is as you expected.
The VA allows a great deal of closing costs to be financed into the loan amount. This is because the VA recognizes that one of the biggest obstacles that veterans face when purchasing or refinancing a home is saving up enough money to pay thousands of dollars upfront. The VA allows the VA funding fee and any allowable fees and charges, including the lender’s flat fee. In other words, all closing costs can be financed into the loan amount – with but one exception. The VA will only allow the borrower to finance two discount points into the loan amount. The borrower can purchase more than two discount points, but can only finance two of them into the loan.
As a borrower, it’s important for you to know that there are some things the lender can charge you for and some things they cannot. For example, the lender can charge you for any “customary and reasonable” expense of getting a credit report or appraising that they incur to satisfy their own requirements for lending. The rest of the allowable fees and charges that a lender can put on the borrower will be discussed in the articles about chapter 8 in the Handbook.
Another option that the lender might offer you is for them to set the interest rate high enough on the loan that the lender can pay all of the closing costs on your behalf. In reality this works out much the same for you as the borrower as simply financing the closing costs into the loan, but it is a different way of getting there and may be advantageous depending on your situation. Also, as a borrower you should know that if your loan is 30 days past due (perhaps that’s why you’re refinancing) that the lender can include late payments and even costs of their legal actions if they’ve already commenced before refinancing.