Deciphering the VA Lender’s Handbook Chapter 6 Part 4
In the previous article, we talked about the maximum loan amount that a borrower can get on the VA’s streamline refinance option, commonly referred to as an IRRRL. We also talked about if and when a borrower can get any cash in their pocket upon closing an IRRRL. Those are both commonly asked questions about the VA IRRRL, and now we’re going to cover a few more common and important questions. In this article, we’re going to cover how a VA borrower’s entitlement is affected by an IRRRL, the maximum loan term on an IRRRL, and title/lien requirements that the VA puts on IRRRLs.
The first thing in the Handbook worth mentioning is that no additional charge to the veteran’s entitlement is made to process an IRRRL; in other words, the amount of used and available entitlement remains the same before and after getting an IRRRL. Interesting factoid: an IRRRL can be made for a higher loan amount, an equal amount, or lower amount as the original VA loan being refinanced. While a disparity between the IRRRL loan amount and the original loan can affect the amount of guaranty on the loan, it will not affect the veteran’s use of entitlement. So in what scenarios might an IRRRL be made for a higher amount than the original loan? The Handbook provides an example: “The existing VA loan was originally made for $110,000 with a guaranty of $27,500, or 25 percent. The new IRRRL is for $112,000. The guaranty on the new loan is $28,000 or 25 percent, but the veteran’s entitlement use remains at $27,500.” In this example, the new loan is likely higher because only a short time has passed since the original loan was closed (not much principal has been paid off yet), and the borrower rolled something into the loan like closing costs or energy efficiency upgrades.
The same is true for when the new loan is for less than the old loan; the borrower’s used entitlement remains the same. The Handbook gives this example: “The existing VA loan was originally made for $42,000 with a guaranty of $25,000, or almost 60 percent (the percentage applicable under former law). The new IRRRL is for $40,000. The guaranty on the new loan is $20,000 or 50 percent, but the veteran’s entitlement use remains at $25,000.” For you as the borrower, all you need to know is that the amount of entitlement you are using stays the same no matter the amount of your IRRRL. On the lender’s side, there is more to consider, but for the borrower that’s the only important thing to note on this subject.
As you’re planning to use an IRRRL to refinance your VA loan (as of the writing of this article, this is a good time to do it because interest rates are still quite low), you’ll probably want to know the maximum loan term you can get on an IRRRL. The rule is fairly simple; the loan term on an IRRRL can be as much as 10 years longer than the original term, but not longer than 30 years and 32 days. Since most loans are either 15 or 30-year loans, you can expect the limit on the length of your VA loan to be either 25 or 30 years. In other words, you should be able to get the term that you want on your IRRRL.
The last thing we’re going to talk about in this article is the situation regarding the title and lien on your VA loan when you do an IRRRL. It is VA policy (and would be every lender’s policy even if the VA didn’t require it) that the IRRRL must take over the first lien on the home being refinanced. While this normally doesn’t cause any problems, it does mean that any other lienholders on the home must agree to be subordinate to the holder of the IRRRL. This may come up if you have more than one mortgage on your home. There are a couple other rules that apply here and may affect your plans for your IRRRL. VA policy states that a borrower cannot use the proceeds from an IRRRL to pay off any liens besides the existing VA loan being refinanced with the IRRRL. Also, in order to use an IRRRL, the borrower (or surviving spouse) must still own the property being refinanced.