It is commonly known that VA loans require borrowers to live in the home they use VA financing to purchase. If you check the box on the loan application stating you plan to use the property as an investment, you cannot secure standard VA financing and the lender needs to find a different option for you. What happens if you have a VA loan already and you wish to refinance it? If you use the VA IRRRL, known as the VA Interest Rate Reduction Refinance Loan, the occupancy requirements differ slightly and work to your benefit.
Standard VA Loan Occupancy Requirements
When you obtain your original VA loan, the occupancy requirements which you must certify as true are as follows:
- You must agree to live in the property within a reasonable amount of time. If the home is immediately accessible, you should move in as close to the closing date as possible. If the home is not immediately livable, you must be able to move in within 60 days in order to be eligible for VA financing.
- If you are on active duty, your spouse or children can satisfy the requirements to live in the property for you. This requires the occupant to sign the appropriate VA forms to ensure compliance with the requirements.
The Different VA IRRRL Occupancy Requirements
The VA IRRRL has different occupancy requirements. According to the VA, the intent to occupy the property as you stated at the closing of your original VA loan was not a permanent intent. The VA and you cannot predict how your future will change. If you decide to move out and purchase another home, while keeping this home, you are free to do so and keep your VA loan without penalty. You do not need to verify occupancy for the VA IRRRL program in order to be eligible.
The VA assumes you will be in a better position if you were to not only refinance your current VA loan into a loan with a lower interest rate, but also if you rent out your home. You have money to cover the mortgage payment on the VA loan, which is now lower. Of course, in order to qualify for additional financing for another home, you have to qualify with the existing VA loan payment, which might be difficult for some people, especially if you have to turn to conventional or FHA financing since you already used your VA entitlement.
How Soon is too Soon to Refinance?
The VA does not disclose the length of time they require veterans to live in the home before they move out and keep their VA loan. They leave it up to lender discretion. For example, if you closed on your VA loan on January 1st and moved out February 1st to offer the home for rent, there might be a problem as this could seem like malicious intent on the VA’s part. No lenders will provide you with new financing because you clearly violated the terms of the loan. On the other hand, if 12 months pass by and you wish to move out of your current home and rent it out, most lenders will be okay with it.
A Positive Payment History
The largest factor the VA and lenders focus on with the VA IRRRL program is your housing history. How many late payments did you make? This will determine whether you are eligible for the VA IRRRL program. Typically, you are allowed one late payment, no more than 30-days late, in the previous 12 months. If, however, you originated your loan less than 12 months ago, you cannot have any late housing payments in order to qualify. This is one way the VA and lenders regulate how long you live in a home before moving out while keeping your VA loan.
The Other VA IRRRL Requirements
The VA IRRRL requirements are very minor compared to any other loan program. As long as you have the proper payment history, the rest is easy to meet. You do not need to prove your income, debt ratio, assets or the value of your home. The lender can qualify you for the refinance with the payment history alone. Without the need to prove owner occupancy, it is rather easy to refinance into a lower interest rate. The largest downside is the need to pay a new funding fee, which is 0.5% of the loan amount as of right now.
The lack of occupancy requirements for the VA IRRRL program makes it easy to refinance into a loan with a lower interest rate. Veterans who get transferred or who have different life circumstances than when they first purchased their home can benefit from this flexibility. Having the ability to secure a lower interest rate can save you money in the long run. If it turns out you are able to turn your original purchase into an investment, the VA does not penalize you for it. This gives you flexibility as far as your future and what you want to do with your current home.