When an IRRRL Can Get a Little More Complicated

The VA offers a streamline refinancing option called the Interest Rate Reduction Refinance Loan, or IRRRL for short. As the name implies, the purpose of the IRRRL is to offer veterans a streamline refinance that can result in a lower interest rate, and generally a lower monthly payment. The IRRRL is a great option for veterans hoping to get more favorable terms on their mortgage for the rest of the loan. Refinancing in general can be done for one of several reasons: it could be that the borrower has saved up a large sum and would like to take a chunk out of the remaining principal all at once, then get new terms based on the remaining loan amount. It could be that the borrower is looking for a way to acquire a relatively large sum of money for a major purchase like a car or to start a business, so they refinance for an amount slightly larger than what they still owe on the home. And last, it could be simply that the borrower is looking for a lower interest rate and lower minimum monthly payment, and they now qualify for a better interest rate.

Streamline refinancing is usually a very attractive option because it usually does not require any further underwriting – the majority of the information is transferred over from the previous mortgage that the refinance is replacing. It would naturally come as a shock, then, when many borrowers applying for an IRRRL are asked to complete a new credit application or have their home re-appraised. Generally speaking, the VA does not require these things to be done over in order to apply for an IRRRL, but like most things in life, there are exceptions to this rule. What those things might be, well, that’s what we’re covering here. It may come as a relief that much of it hinges on the borrower.

For the most part, any IRRRL that would require a new credit application or appraisal would do so because of the refinancing needs of the borrower. Usually, the reason a borrower has for wanting to refinance and the results they’re hoping to see from the refinance can necessitate a new credit report and/or home appraisal. More specifically, the borrower’s wants or needs might end up raising the monthly payment from what it used to be. This is where a potential problem arises; just because the borrower was able to meet the previous monthly payment does not mean they will be able to meet a higher one. These borrowers can still get an IRRRL, there are just more steps involved.

The VA starts to get uneasy when the monthly payment is going to increase by 20% or more. In other words, if a $1000 monthly payment goes up to at least $1200, the VA will have extra steps to go through before the IRRRL can be approved. At that point, it means that the lender needs to go through the necessary paperwork to establish that the borrower has the income and stability to support the new amount. The VA regulations state:  “If the monthly payment…increases by 20 percent or more, the lender must determine that the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable…” But wait, folks there’s more.

Not only do those underwriting steps need to be repeated, but the lender must also provide a certification that the the borrower is financially prepared to take on the higher monthly mortgage payment, and the borrower and lender must both sign a statement that acknowledges that they understand the effect that the IRRRL will have on the monthly payments and interest rate. The statement must take all of the pertinent information from the previous loan and the new loan and compare them side-by-side, so that there is no way to misunderstand what the effects of the new loan will be.

Even in cases where the VA does not require an appraisal or credit check, the lender has flexibility in being able to require an appraisal if it is appropriate in the given situation, but they may be expected to account for and explain why an appraisal is being required.

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