The VA IRRRL program is a great way to refinance your VA loan with little verification required. The process is simple and with the right lender and the right circumstances, you can get it done within a short amount of time.
Before you apply for the VA IRRRL program, though, there are some things you should know.
You Need a Timely Mortgage Payment History
One of the main qualifying factors for the VA IRRRL is a timely mortgage payment history. Lenders are supposed to use the last 12 months of your mortgage payment history to qualify you for the loan. They want to see that you don’t have any late payments in that time.
Some lenders do allow an exception, allowing one 30-day late payment within the last 12 months. You must be current on your payments at the time of application, though. If you have had your loan for less than 12 months, though, you must have all on-time payments.
You Need to Benefit From the Refinance
The only other requirement the VA has in place is the need for a benefit. In other words, it must make sense for you to refinance. If you aren’t going to save money or you aren’t getting a better term, it doesn’t make sense to refinance.
Lenders don’t have a specific benefit that you must have. They just need to see that it makes sense for you to refinance. Each lender may have a different threshold regarding the benefit of refinancing, so it’s worth asking each lender that you apply with for the VA IRRRL.
Lenders May Have Overlays
Now that you know the VA requirements, it’s important to understand that you may experience lender overlays. These are requirements that the lender puts in place on top of what the VA requires. Some lenders want to know that you are a good risk beyond the requirements that the VA has. Some of the most common lender overlays include:
- A certain credit score – The VA doesn’t require lenders to pull your credit, but many lenders do anyway. They want to know that you are still a good risk for the loan, especially if they aren’t the lender that holds your current VA loan.
- A low debt ratio – The VA isn’t big on debt ratios, but that doesn’t mean that lenders won’t calculate your debt ratio to make sure you can afford the loan. If the lender thinks that your financial status may have changed since you bought your home, they may want to know your debt ratio to make sure that the new loan is a good fit.
- An appraisal – The VA doesn’t require a new appraisal for the VA IRRRL program, but some lenders may want to know the value of your home. If they don’t require a full appraisal, like you got when you bought the home, they may require a drive-by or automatic valuation just to make sure the home is still a good risk.
You Can’t Receive Cash in Hand
The VA IRRRL program stands for the Interest Rate Reduction Refinance Loan. In other words, it’s a rate/term refinance. You cannot take cash out of your home’s equity. Even if you have equity, it has to remain in the home with this program.
If you do need to take cash out of your home’s equity, you must apply for the VA cash-out refinance, which has stricter requirements. You can’t get by without verifying every aspect of your loan with the cash-out loan.
You Don’t Need Your COE
When you bought your home, you had to provide your COE or Certificate of Eligibility. This certificate lets lenders know that you are eligible for the VA loan program. Without the COE, the lender doesn’t know if you have VA benefits, which can hurt the lender in the end. The VA guarantees loans for veterans, which means they will pay the lender back 25% of the amount they lost if you default on the loan.
Because you supplied the COE for your original VA loan, you don’t need to supply it again. If the lender needs it, they can pull up an electronic copy from your loan file as each VA loan has a case number assigned to it. The lender can reference any documents that pertain to your loan electronically.
If you Don’t Have a VA Loan Now, you Can’t Refinance With the VA IRRRL
Even if you are a veteran that has VA home loan benefits, you cannot use the VA IRRRL program to refinance. Instead, you need the VA cash-out refinance. As we stated above, the cash-out program requires more verification, which includes your credit score, income, assets, debt ratio, and home value.
Some veterans don’t use their VA loan benefits right away and instead use the FHA or even conventional loan that they qualify for when buying a home. Later on down the road, they may see that VA interest rates are nice and low and they want to take advantage of them. Even if they don’t need cash out of their homes’ equity, they still need to use the VA cash-out refinance.
The VA IRRRL is a great way to lower your payment or refinance to get out of a risky term. If you are eligible, it can be a great way to refinance your loan. If you come across a lender that requires too much, you have the opportunity to shop around with other lenders – you don’t even have to use your current lender. This gives you the chance to find the loan that is best for you.