Deciphering the VA Lender’s Handbook Chapter 6 Part 9
All of chapter 6 in the Handbook is dedicated to talking about the two main types of refinancing options in the VA loan program: Interest Rate Reduction Refinance Loans (IRRRLs) and cash-out refinances. There are other types of refinances, but the great majority fall under one of these two types. In all of the articles, however, there has not been a clear and concise comparison between the two types that will help you determine which one is best for you. The Handbook provides a great reference table with this in mind. The table below is taken directly from the Handbook and compares the IRRRL and the cash-out refinance side-by-side.
|Purpose||To refinance an existing VA loan at a lower interest rate||To pay off lien(s) of any type – can also provide cash to borrower|
|Interest Rate||Rate must be lower than on existing VA loan (unless existing loan is an ARM)||Any negotiated rate|
|Monthly Payment Amount||Payment must be lower than that on an existing VA loan (unless the ARM is being refinanced, a term is shortened, or energy efficiency improvements are being included)||No requirement|
|Discount Points||Reasonable points can be paid – only two of these points can be included in the loan amount||Reasonable points can be paid – if paid from loan proceeds|
|Maximum Loan||Existing VA loan balance, plus allowable fees and charges, plus up to two discount points, plus the cost of any energy efficiency improvements, plus the VA funding fee||100 percent of the reasonable value of the property indicated on the NOV, plus the cost of any energy efficiency improvements, plus the VA funding fee|
|Maximum Guaranty||Guaranty is at least 25% in all cases (See section 1, subsection h of this chapter)||Maximum guaranty is the same as for purchases|
|Entitlement||Veteran re-uses the entitlement used on the existing VA loan – the IRRRL does not impact the amount of entitlement the veteran has in use||Must have sufficient available entitlement – if existing VA loan on the same property is being refinanced, entitlement can be restored for the refinance|
|Fees and Charges in the Loan||All allowable fees and charges, including up to two discount points, may be included in the loan||Allowable fees and charges and points may be paid from the loan proceeds|
|Cash to Borrower||Not permitted||Borrower can receive cash for any purposes acceptable to the lender|
|Lien/Ownership||Must be secured by first lien – veteran must own property||Must be secured by first lien – veteran must own property|
|Refinance of Other Liens||Cannot refinance other liens – can only refinance the existing VA loan||Can refinance any type of lien(s)|
|Maximum Loan Term||Existing VA loan term plus 10 years, not to exceed 30 years + 32 days||30 years +32 days|
|Occupancy||Veteran or spouse of an active duty servicemember must certify to prior occupancy||Veteran or spouse of an active duty servicemember must certify as to intent to occupy|
|Appraisal||No appraisal is required||Appraisal is required|
|Credit Underwriting||No underwriting is required except in certain cases||Full credit information and underwriting are always required|
|Automatic Authority||All lenders can close IRRRLs automatically, except if the loan being refinanced is 30 days or more past due, prior approval is always required||Only lenders with automatic authority can close these loans automatically|
|Law||38 U.S.C. 3710(a)(8)||38 U.S.C. 3710(a)(5)|
If the above table does not address your specific question concerning the difference between an IRRRL and a Cash-out refinance, your best bet is to talk directly with your lender. Your lender is always the best resource to find out information concerning your options and specific situation. IRRRLs can be most advantageous for borrowers who simply want to take advantage of lower interest rates and perhaps make some energy efficiency improvements to their home. Cash-out refinances are best when the borrower has a large expenditure that they would like to use equity in their home to pay for – such as an addition to the home, paying cash for a new car, or even consolidating credit card debt into your mortgage payment.
An important point to remember that the table above only sort-of mentions is that an IRRRL can only be done if the mortgage on your home is already a VA-guaranteed loan. If the current mortgage on your home is a conventional or FHA loan, and you want to refinance it into the VA loan program, the only way to do that is with a cash-out refinance.