VA IRRRL Program — What to Know

VA IRRRL program is short for interest rate reduction refinance loan. It's also referred to as the VA streamline. An IRRRL takes an existing VA loan and refinances it to reduce the interest and/or shorten the term. With interest rates being at historic lows, many homeowners with VA loans are interested in refinancing them. Today, we'll discuss a few of the common questions borrowers have, including fees, how long it takes, as well as appraisal and credit requirements. Read on to answer the question: How does a VA refinance work?

VA IRRRL Refinance Program

VA IRRRL home loan refinances are extremely popular. The main reason borrowers apply for this loan is to lower their interest rate. Besides reducing their interest, borrowers like that these loans are fast.  An IRRRL requires much less paperwork and documentation. Most lenders do not require proof of income or a credit check. But with the uncertainty during the pandemic in 2020, some lenders now require these checks. Check with your lender to see what their current policy is.

There are a few rules you should be aware of. These are:

• If both the current rate and new rate are fixed, the new interest rate will need to be at least .50 lower. For example, 4.0% to 3.5% is the minimum acceptable reduction.
• There's also loan seasoning. To refinance, it has to be at least 210 days between the first due date of your current loan and the closing on your new VA loan.
• The mortgage must be current, and you can't have any 30-day (or greater) mortgage late payments within the last 6-months.
• Borrowers on the current loan need to be on the refi except under certain circumstances like divorce or death.
• The borrowers need to certify that they currently live in the property or previously did. That means if you no longer live there, but did at one time, you can still refinance the property — even if it's a rental or second home.
• There is no cash-out. If you need cash-out, you'll need to do a VA cash-out refinance.  In that case, there will be more documentation required, you'll need an appraisal, and the loan will take longer.

VA IRRRL Appraisal Requirements

For most VA loans, there are VA loan minimum property requirements. But those don't apply since IRRRLs don't require an appraisal. That is unless you're refinancing a fixed-rate into an adjustable-rate mortgage (ARM). Be aware that not all credit unions and banks offer VA ARMs.

The no appraisal requirement is one of the big reasons these refinances are so much faster. During peak seasons, VA appraisers get very busy, and their schedules can get stacked up.

VA IRRRL COE

The U.S. Department of Veterans Affairs (VA) provides a certificate of eligibility (COE). This document proves a veteran or service member is eligible to receive a VA loan. It also gives your lender the information they need regarding your entitlement.

You'll need your DD 214 to get your COE. As long as you have that, your lender can help you get your VA certificate of eligibility (COE).

VA IRRRL Recoupment

One of the rules for a refinance is that it has to be in the borrower's best interest. It needs to make sense financially. Here are a few things to keep in mind:

To get approved, the principal and interest payment on the new loan has to be lower than what it was on the loan being refinanced. Although there are exceptions, if the payment is going up, the loan may not be approved.

There are exceptions to this:

• The IRRRL is refinancing an ARM
• The term of the IRRRL is shorter than the term of the loan being refinanced or
• Energy efficiency improvements are included in the IRRRL

And since all refinances have fees, the monthly savings have to outweigh the costs. That's where recoupment comes in. Recoupment is how long it takes to recoup (regain) the fees and closing costs of the refinance. That time cannot take longer than 36 months.

Here's how it works: add up the fees and divide that amount by your monthly savings. VA Circular 26-19-22, Exhibit B shows specific examples and what fees are and aren't included in the calculation.

The VA funding fee, escrow, and prepaid expenses like taxes, insurance, special assessments, and HOA fees are not included in the recoupment calculation.

Here's a simple explanation:

• If your total fees cost $3,000 and your new payment saved you $100 per month — you would recoup your costs in 30 months. That would be acceptable since it's shorter than 36 months.
• If your total fees cost $4,000 and your new payment saved you $100 per month — you would recoup your costs in 40 months. That would not be acceptable since it exceeds 36 months.

VA IRRRL Fees

An IRRRL also costs less than other types of refinances. One of the largest fees for VA loans is the funding fee. For a cash-out refinance, the funding fee ranges from 2.3% to 3.60%. The good news is that the VA IRRRL funding fee is only 0.5% unless you're exempt, in which case you won't have a VA funding fee.

Although the VA sets the funding fee, VA IRRRL closing fees aren't determined by the VA. The lender and other third parties like the title company set their fees. Some standard lender fees include origination and processing fees. However, not all lenders charge these, so it's good to shop around. 

The lender estimates any third-party fees. Your loan estimate will detail all of the costs. Some standard third-party fees are escrow services, title insurance, and recording fees.

Within three days of applying, your credit union, bank, or mortgage broker will give you a written comparison of your old loan to your new loan. That way, you'll see all the fees and the costs of your loan. Then you can compare for yourself whether it makes financial sense to refinance.

There are so many benefits of VA loans, especially the streamline VA IRRRL. So, whether you're buying or refinancing, if you're eligible — consider VA mortgages first.