Handbook Sparknotes Chapter 6

 

VA Loan Refinancing Options – VA Lender’s Handbook Chapter 6

VA Lender Handbook Chapter 6

This article is a summary of Chapter 6 of the VA Lender’s Handbook. We’ll try to hit on the important things that the chapter covers here, but Chapter 6 is a particularly valuable piece of the Handbook and has a lot of really good information on refinancing in the VA loan program. Anyone looking to refinance a VA loan really should read the entire chapter, which you can find here. You can also check out our articles on Chapter 6 of the Handbook if you are looking for a simpler explanation of what the Handbook is talking about. Chapter 6 of the Handbook is all about the different refinancing options that the VA loan program has within it: the Interest Rate Reduction Refinance Loan and the Cash-out refinance.

 

The Interest Rate Reduction Refinance Loan

This refinancing option, also known as the IRRRL, is definitely the option to choose if you can. In order to use it, however, you need to already have a VA loan and be refinancing into another VA loan, and you cannot use this option to get cash out on your refinance. The IRRRL is a great option because it’s streamlined, meaning that “Generally, no appraisal, credit information or underwriting is required on an IRRRL, and any lender may close an IRRRL automatically.” IRRRLs also have a requirement that the interest rate decrease, with only a few exceptions. In addition to that, the monthly payment must decrease unless the loan term is shorter or an EEM is included on the loan. An EEM is an Energy Efficiency Mortgage, which you can add on to your IRRRL to pay for improvements to your home that will lower your utility bills. Before you get too crazy adding stuff to your IRRRL, you should know that if you add an EEM, finance your closing costs as part of the loan, and shorten your loan term, your monthly payment will probably rise significantly, and if it rises more than 20%, you will need to undergo some form of underwriting to make sure that you can afford the increased monthly payment. While even in this case an IRRRL is a better option than a cash-out refinance, it does make the IRRRL a bit less of a benefit.

 

Other benefits of the IRRRL include the ability to roll all of your closing costs into the loan, a significantly reduced VA Funding Fee, and the ability to complete the refinance very quickly.

The Cash-Out Refinance

Cash Out RefinanceCash-Out refinance is somewhat of a blanket term that covers any type of normal refinance (not a streamline). In other words, you may actually be putting cash into the mortgage, but it would still be called a cash-out refinance. A VA cash-out refinance is going to be the option you’ll want if you are refinancing from a conventional or FHA to a VA loan, or if you are wanting to take advantage of the equity you have in your home for another purpose. If neither of those two situations applies, then you’ll be better off with an IRRRL. A significant difference between the cash-out refinance and the IRRRL is that if you use the cash-out refinance you must certify that you intend to personally occupy the residence as your home after the refinance, while on the IRRRL you simply need to certify that you occupied the residence at some time in the past. This difference in occupancy requirements allows those who needed to move for one reason or another (like PCS orders), to keep their current home and still use VA loan benefits to purchase another home in their new assignment.

 

Comparing the Two

We’ve already talked a little bit about how the two compare and use cases for each one, but overall if you don’t need cash out and you already have a VA loan, you should at least try to get an IRRRL before going for a cash-out. IRRRLs can sometimes be difficult to get if interest rates have risen and you are not able to find a lender that will give you a lower interest rate than the one you currently have, and in those cases, a cash-out refinance will be a better option for you. All in all, it depends completely on your situation because one option is suited to certain circumstances and the other option is suited to other circumstances.

 

IRRRLs vs. Cash-Out Refinancing Loans At-A-Glance

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.

Feature IRRRL Cash-out Refinancing
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.

 

Cash-out Refinancing Loans

Deciphering the VA Lender’s Handbook Chapter 6 Part 8

The last bunch of articles has focused on the VA’s streamline refinance option, called the Interest Rate Reduction Refinance Loan, or IRRRL. The IRRRL can be most advantageous when the borrower is refinancing primarily to take advantage of lower interest rates. However, there are times when a borrower would like to refinance to take advantage of the equity they have in their homes. Equity is how much the home is worth minus how much the borrower still owes on it. Borrowers can use the equity they have in their home to get a cash-out refinance. This article will cover everything that Chapter 6 in the VA Lender’s Handbook has to say about cash-out refinances.   Cash Out Refinance

The VA considers cash-out refinances as any refinance that can be used to pay off any liens against the secured property. Specifically, the handbook states that the liens can be either current or delinquent, and from any source.

Usually, liens against homes come from taxes, judgment liens, or other mortgages. However, proceeds from the loan above and beyond the amount to cover liens on the home can be used for any purpose acceptable to the lender. If you need to purchase a new car (or pay off credit card debt), you can usually do so with a cash-out refinance. An important rule to remember is that the cash-out refinance must be secured with a first lien on the property.   The amount of equity is very important in regards to a cash-out refinance because you cannot get a loan amount higher than 100% of the value of your home (plus the VA funding fee and energy efficiency improvements).

Since the bulk of the loan amount will go towards the money you still owe on the home, you have only the amount of equity you have in your home to cover whatever you wanted cash out for. You can even use cash out from the refinance to pay for discount points to your interest rate for the new loan.   Borrowers will be glad to know that the maximum guaranty for cash-out refinances is the same as for new purchase loans. This is a rather new development, however. Prior to October 10, 2008, the maximum guaranty allowable on a cash-out refinance was $36,000.

The VA recently made a change to its program to have cash-out refinances have the same maximum guaranty as regular new purchase loans. The maximum guaranty depends on where you live and your lender will be aware of what the maximum guaranty will be for your cash-out refinance.   You should make sure that you have sufficient entitlement available for the cash-out refinance. This is usually not a problem when refinancing an existing VA loan, as the VA will consider entitlement restored because the new loan will be paying the balance of the old loan. There can be a problem with this if you are trying to use all of the equity in your home, but had to make a down payment on the original loan in order to get the loan amount low enough for your eligibility to cover it, but this happens less often than you might think.

The occupancy requirement on these refinances is the same as for new purchase loans, which is that the borrower must certify that he or she is intending to occupy the home as their primary residence. Depending on whether your lender has automatic authority, they will be able to approve the cash-out refinance without needing to submit the application to the VA for approval. If your lender does not have automatic authority, be aware that there will be a delay in closing your loan for the VA to give prior approval on the loan. As far as processing the loan goes, cash-out refinances are nearly identical to normal new purchase loans. A new appraisal of the home, new credit information, and new underwriting are all required as part of the refinance. The benefits of a cash-out refinance are that you are able to take advantage of the equity in your home, while the benefits of an IRRRL is that the process is much faster, simpler, and cheaper.

IRRRL Made to Refinance a Delinquent Loan

Deciphering the VA Lender’s Handbook Chapter 6 Part 7

 

The last six articles covered in-depth information about the Interest Rate Reduction Refinance Loan (IRRRL), the VA loan program’s streamline refinance option. For everything you ever wanted to know about IRRRLs, check out those articles. This article is going to go deeper into something that was touched on in the last article: when an IRRRL is used to refinance a loan that is 30 days or more past due. Loans that are 30 days or more past due are considered delinquent and must be handled differently than loans that are up-to-date or even less than 30 days past due. The biggest difference in the way it must be handled is that prior approval by the VA is required – even if the lender has automatic authority.

 

Best Refinance for Late PaymentsBefore the lender is permitted to submit the IRRRL to the VA for prior approval, they are required to obtain whatever information and perform whatever analysis is needed to determine that the cause of the delinquency has been resolved and the veteran is willing and able to make the proposed loan payments. While the lender has some flexibility in what documentation and supporting evidence can be used, it will still depend primarily on debt-to-income ratio and whether the borrower’s work is reliable and stable enough to take a risk on. Usually, the cause of delinquency is either out-of-control credit card debt or the loss of a job. In either of these cases, if the issue has been resolved, usually there’s a paper trail to serve as evidence.

 

If, after gathering information and analyzing it, the lender determines that the cause of delinquency has been taken care of and the VA-eligible borrower is willing and able to make the monthly payments, then they submit a packet to the VA that includes a great deal of things. First, the full name of the veteran and all other obligated parties, the number of the VA loan being refinanced as well as the month and year the original loan was closed, the identity of the lender making the proposal, the loan amount, interest rate, and term of the new vs. old loan, and any discounts to be charged.

 

The lender must also include a statement by the VA-eligible borrower that he or she understands the effects of the IRRRL including the new interest rate and monthly payments and how long it will take to recoup the closing costs. The borrower will also have to sign a document certifying their occupancy status, whether it was previously occupied or they are currently occupying it. The lender will also add several worksheets, the borrower’s Certificate of Eligibility, and the Uniform Residential Loan Application (URLA). However, the lender determined that the borrower is ready for an IRRRL must also be attached to the packet. The lender must include evidence pointing to the cause of the delinquency, as well as evidence that shows the cause has been taken care of.

 

Lastly, the lender must include a credit report, a current pay stub and verification of the borrower’s employment, a loan analysis and documentation of any energy efficiency improvements that are to be included on the loan. After submitting the packet, the lender must wait until he or she hears back from the VA. The VA will inform the lender of its decision, and provide a Certificate of Commitment if the loan application has been approved. Once approved, the lender will work with the borrower on closing the IRRRL. The lender has 60 days from the date of closing to report the loan to the VA.
When reporting the IRRRL, the lender shouldn’t need any information above and beyond what was obtained in order to apply for prior approval, except a receipt for the funding fee, whether it was paid in full at closing or rolled into the loan amount. As a borrower, it’s important for you to know that any late payments and late charges – and even the cost of legal actions taken by the lender – can be included in the loan amount. In some cases, the impact to the monthly payments can be great enough that the lender must reconsider whether the borrower is qualified for the loan.

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 6

Deciphering the VA Lender’s Handbook Chapter 6 Part 6

In the previous article, we went into depth about situations where the Chapter 6 Part 6obligors on a VA loan has changed and the borrower wants to do an IRRRL to refinance the loan. There are many situations where the co-borrowers may change – a veteran may get a divorce, get married (or both), have a falling-out with a non-spouse co-borrower, or something else. Check out the Chapter 6 Part 5 for more details on when you can and cannot conduct an IRRRL. In this article, we’ll be going over a great deal of small tidbits about IRRRLs, all of which are valuable for borrowers to know. This article will wrap up our coverage of IRRRLs in general, but we’ll still have a special case to cover in the next article.

 

The first thing we’re going to talk about is how the occupancy requirement is different when you’re applying for an IRRRL than when you are applying for a new purchase loan or a normal refinance. Typically, the occupancy requirement is that the VA-eligible borrower is occupying or intending to occupy upon purchase, the property being financed with the VA loan. In an IRRRL, however, the borrower simply needs to certify that he or she previously occupied the property as their primary residence. The Handbook provides the following example: A veteran living in a home purchased with a VA loan is transferred to a duty station overseas. The veteran rents out the home. He/she may refinance the VA loan with an IRRRL based on previous occupancy of the home.

 

Next, you as the borrower should be aware that your VA loan carries an identification number, and that refinancing using an IRRRL gives your loan a new identification number. Generally, you won’t be required to know or use your loan’s number, but it’s a good thing to have tucked in a filing cabinet just in case.

 

On a different note, it’s good for you to know that as a streamline refinance option, generally no credit information or underwriting is required on IRRRLs. The exceptions are loans being refinanced that are 30 days or more past due, or when the monthly payment will increase by 20 percent or more. A possible (but not definite) case where credit underwriting may be required is when the borrower has filed a recent Chapter 13 bankruptcy. What further streamlines the process for an IRRRL is that any lender can close on one without prior approval from the VA – even lenders without automatic authority. The only exception to this case is for IRRRLs refinancing a loan 30 days or more past due. There are, however, cases where a lender may feel it is appropriate to submit the loan to the VA for prior approval even though they don’t have to. Your lender will only do this if he or she has a good reason, so trust them and don’t give them a hard time.

 

As mentioned above, any lender with or without automatic authority can close an IRRRL without prior approval from the VA except for loans that are 30 days or more past due. The lender does, however, have to report the IRRRL to the VA within 60 days of closing. When the lender reports the IRRRL to the VA, they have to include a lot of documents, many of which they will need you to provide or prepare. First, they must submit a VA Form 26-0286 or a VA Loan Summary Sheet. You will likely have seen this sheet and it outlines the new loan being closed by the IRRRL. Next, the lender will need to include your Certificate of Eligibility (COE) or a request for a duplicate COE.

 

The lender also needs to include the funding fee receipt. You will either have paid the funding fee in full or rolled it into your loan and the lender is paying the cash upfront. Next, the lender will need to provide a document signed by you that states you know and understand the effect that the refinance is going to have on your monthly payments and interest rates. Before you sign this document, make sure you have compared the old and new interest rates, old and new monthly payments, and how long it will take to recoup the closing costs if you have a lower monthly payment. The lender will also submit several worksheets that they can usually generate and fill out on their own.

 

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 5

Deciphering the VA Lender’s Handbook Chapter 6 Part 5

In the previous article, we talked about the rules surrounding the title/liens on the property being refinanced with an IRRRL. We also hit on the maximum loan terms on IRRRLs and went into good depth explaining how a veteran’s entitlement is affected by using an IRRRL to refinance their home loan. In this article, we’ll be talking mostly about two topics: who the VA allows IRRRLs to be made to, and the underwriting considerations a lender has when the obligors on the loan have changed and the borrowers would like to apply for an IRRRL. There is a surprising amount of information about who IRRRLs can be made to and surprisingly little about underwriting considerations when obligors have changed.

 

So, for the most part, the party or parties obliged on the original VA loan must be the same as the parties obliged on the IRRRL. Typically, the VA-eligible borrower must also still own the property. In explaining the cases a lender might face, the Handbook provides a table showing the different scenarios, with a simple “Yes” or “No” as to whether an IRRRL can be made in this situation. Below is the table:

Parties Obligated on Old VA Loan Parties to be Obligated on new IRRRL Is IRRRL Possible?

 

1 Unmarried veteran Veteran and new spouse Yes
2 Veteran and spouse Divorced veteran alone Yes
3 Veteran and spouse Veteran and different spouse Yes
4 Veteran alone Different veteran who has substituted entitlement Yes
5 Veteran and spouse Spouse alone (veteran died) Yes
6 Veteran and non-veteran joint loan obligors Veteran alone Yes
7 Veteran and spouse Divorced spouse alone No
8 Unmarried veteran Spouse alone (veteran died) No
9 Veteran and spouse Different spouse alone (veteran died) No
10 Veteran and non-veteran joint loan obligors Non-veteran alone No

 

In explanation of the table, the VA offers the following explanation: “In Case 7, the divorced spouse is keeping the home and wishes to refinance.  The spouse cannot get an IRRRL unless the veteran agrees to be obligated on the new loan and commit his or her entitlement to the new loan.  A person without entitlement cannot get an IRRRL or any other type of VA loan. In Cases 8 through 10, the applicants cannot obtain an IRRRL because they do not include the veteran or a person who was the veteran’s spouse at the time the original loan was made, and who was obligated on the loan along with the veteran.”

 

The Handbook also explains that in cases where both the marriage and death of the veteran happen after the original loan has been made, and no refinance was done to add the spouse to the loan before the death of the veteran, the spouse cannot use an IRRRL to refinance the home. In the event that a veteran divorces, remarries, and dies after making the original loan (an eventful loan term), if the new spouse is not already a co-obligor on the loan, the spouse cannot use an IRRRL to refinance the home. Also, it is not unheard of for a VA-eligible borrower to close on a loan with a non-spouse, non-VA eligible co-borrower. In the case where the non-VA eligible co-borrower is wanting to refinance the home by him or herself, an IRRRL cannot be used since there is no entitlement available for the VA to guarantee the loan.

VA Eligible Borrowers
In the cases where it is allowed to have different obligors on the IRRRL than on the original loan, lenders must consider how they are going to make sure that the borrowers are creditworthy. The VA advises the lender to check the mortgage payment record in lieu of obtaining a full credit report, to obtain a statement from the obligor(s) on the IRRRL asserting their ability to make payments on the new loan with the other obligor’s income. If appropriate, the lender may also ask for a statement concerning the addition of a different spouse or a change in the number of dependents. If you have a situation not outlined above and are hoping to get an IRRRL with different obligors on the loan, it’s best to consult directly with your lender to determine whether an IRRRL will be possible.

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 4

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.

 

Interest Rate ReductionThe 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.

 

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 3

Deciphering the VA Lender’s Handbook Chapter 6 Part 3

 

In the last article we talked about the veteran’s statement and the lender’s certification – two documents that essentially have the same purpose: verify in writing that both parties know what they’re getting themselves into and are OK with it. We also talked about what closing costs can be rolled into the loan (pretty much all of them) and a little bit about options that a borrower has when it comes to getting their closing costs paid for. This article is going to address the oft-asked question of when can a borrower receive cash at closing on an IRRRL? We will also talk about the maximum loan amount available on an IRRRL.

 

closing costs can be rolled into the loanThe first thing a borrower should know about receiving cash at closing is that an IRRRL cannot be used to take equity out of the property or pay off any debts other than the mortgage being refinanced through the IRRRL. Right there, most borrower’s hopes for getting “cash out” or taking equity out of their homes in an IRRRL are dashed. The loan amount in an IRRRL can only be used to pay off the existing VA loan and cover the cost of closing on the IRRRL. The VA is strict about this to the point where the refinancing loan will be rounded down instead of up to avoid paying any cash to the borrower. However, like every rule, there is an exception.

 

The single exception to this rule is that the veteran can be reimbursed up to $6,000 for any energy efficiency improvements that have already been completed within 90 days before the closing date of the loan. It’s important to specify what this exception is and what it is not. This exception is not a check to pay for future energy efficient improvement, nor is it a check to pay for energy efficient improvements that are years old. In some cases, the loan proceeds can be applied to energy-efficient improvements in a way that does not involve cash reimbursement to the veteran. More detail on this will come in the articles about Chapter 7.

 

There are, of course, things that can happen in the natural course of loan closing not specific to the IRRRL process that may result in the borrower receiving cash. Things like computational errors, changes in the final pay-off figures, up-front fees paid that are later added to the loan, and a refund of the escrow balance on the old loan. These will usually not exceed $500 and if they do, the VA must be consulted to make sure that the cash amount paid to the borrower is acceptable. Lenders will know the difference between an equity withdrawal and cash from these administrative circumstances.

 

It is often asked what the maximum loan amount on VA loans, and also IRRRLs are. For an IRRRL, the maximum loan amount available is whatever the existing loan balance that is being refinanced is, plus any late fees, the closing costs, the VA funding fee, and the cost of any energy efficiency improvements. For an IRRRL that includes late fees, it must be submitted to the VA for prior approval regardless of whether the lender has automatic authority. If you are refinancing your VA loan to an IRRRL because you are no longer able to make the payments on the original loan, you should be prepared for more complication than in a normal IRRRL.
Remember that there is no theoretical maximum amount for a VA loan, and since an IRRRL rolls all of the above items into the principal of the new loan, and the VA guarantees at least 25% of the loan, the loan amount might end up higher than the limits established by a secondary market. The lender is responsible for making sure the loan is marketable. Why does this matter to you as a borrower? Because the lender will make decisions based on their need to sell the loan on the market, and what they are willing to offer you will depend on those decisions. While many loans will not run into any issues with this, some borrowers may get frustrated that a lender is unwilling to do what is perfectly allowed by the VA. Their inability to sell the loan after making it could very well be a factor.

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 2

Deciphering the VA Lender’s Handbook Chapter 6 Part 2

 

Interest Rate Reduction Refinancing LoanIn 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.

Interest Rate Reduction Refinancing Loans (IRRRLs) Part 1

Deciphering the VA Lender’s Handbook Chapter 6 Part 1

Deciphering the VA Handbook

Chapter 6 of the VA Lender’s Handbook is dedicated to explaining every aspect of refinancing loans. Chapter 6 focuses in on the Interest Rate Reduction Refinancing Loan and Cash-Out refinances as the two main types of refinances. Over the next series of articles, you’ll learn everything you ever wanted to know about Interest Rate Reduction Refinancing Loans (IRRRLs). By the time we get to cash-out refinances, you’ll be an IRRRL guru. This first article is going to cover some of the basic aspects of an IRRRL – what it is, what it’s for, and what requirements there are for an IRRRL to occur.

 

First, what is an IRRRL? An IRRRL is the VA’s streamline refinance option; a loan that is made to pay off an existing loan and replace it with the terms of the new loan. A streamline refinance is one that uses much of the underwriting information from the previous loan rather than having to go through the entire process all over again – hence the term ‘streamline’. The Handbook also offers the following definition of an IRRRL: “An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan.”

 

The quote above hits on one of the requirements that the VA has for an IRRRL: the interest rate must go down. IRRRLs can be fixed-rate, hybrid adjustable-rate mortgage (ARM), or traditional ARM, but regardless, the interest rate must go down with only one exception – if the loan being refinanced is an ARM, the rate will already likely be close to what could be offered on an IRRRL, maybe lower. Barring that one exception (which comes up a lot in the Handbook), the resulting principal and interest payment on the IRRRL must be less than the principal and interest payment on the previous loan. In addition to the exception we already know about (refinancing an ARM), there are two exceptions that can allow for a higher principal and interest payment than the previous loan:

 

  • the term of the IRRRL is shorter than the remaining term on the loan being refinanced
  • energy efficiency improvements are included in the IRRRL

 

With either (or multiple) of the above exceptions, the veteran’s monthly payment may not only increase – it may increase substantially, especially if one or more exceptional case is combined with the veteran financing their closing costs, financing up to two discount points, financing the funding fee, or a higher interest rate when an ARM is being refinanced. Seeing as how the borrower could easily add $10,000 and more to his or her principal in this case, and elect to have a shorter loan term, and get a higher interest rate if they’re refinancing from an ARM, it makes a great deal of sense to have an exception.

 

Part of what makes a streamline refinance possible is the ability to use the same underwriting information from the previous loan. However, this is not a possibility if the borrower’s monthly payment increases dramatically, because even if the borrower qualified for the previous monthly payment, there’s no guarantee that he or she will qualify for the new amount. Therefore, if the monthly payment increases by 20% or more, the lender is responsible for determining from an underwriting standpoint whether the borrower is qualified for the new loan amount and monthly payment. The lender will also have to provide a certification to the VA in these cases that states that the borrower is qualified for the new monthly payment that exceeds the previous payment by 20% or more.
The next article will start out by covering the required Veteran’s Statement and Lender’s Certification and going into detail about what those require, as well as talking about what closing costs can be included in the loan amount and what costs cannot. The ability to roll closing costs into the loan is one of the great advantages to the IRRRL. If you have case-specific questions that you aren’t sure about, it’s always best to talk to your lender directly.

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