The VA provides veterans the opportunity to refinance their VA loan with very little work. As long as veterans have a solid mortgage payment history and there’s a benefit to the refinance, they may qualify for the IRRRL program. While the lack of verification required is a great benefit, the low allowable fees are an even greater benefit.
Lenders and other involved third parties cannot charge whatever they want on a VA IRRRL; they have to stick to the below requirements.
The Allowable Fees
Lenders, title companies, and the VA each have a hand in the VA loans. They each want to get paid for the work they put into the loan. The VA allows the following fees to be paid by the borrower:
- Discount points – The lender can charge you points to buy your interest rate down. One point usually equals a 0.5% lower rate. However, the cost and discount can vary by lender. This can help further your net tangible benefit for the loan by lowering your payment.
- Title examination and insurance fees – Every time you refinance your home, a title company must search the home’s chain of ownership to make sure there aren’t any outstanding liens on the property. If there is a lien and the first VA loan got paid off, the lien would automatically take first lien position, putting the new loan in second position, which is usually unacceptable.
- Flood zone determination – Most lenders run a flood zone determination whenever you refinance even if you weren’t in a flood zone before. They just want to make sure nothing changed, as they would have to require you to buy flood insurance if you were in a flood zone.
- Recording or courier fees – Any fees charged to record or transport your loan documents is allowed by the VA.
- VA funding fee – The VA charges a funding fee on the VA IRRRL just like they did when you bought the home. The fee is lower this time around, though, at just 0.5%.
Allowable Fees for the Lender
Lenders are in a unique position with the VA IRRRL program. They have one of two options:
- They can charge you an origination fee and nothing else or
- They can charge you itemized closing fees
The chosen method differs by lender. If the lender chooses to charge the origination fee, they may only charge 1 point or 1%. So if you had a $200,000 loan, the lender could only charge $2,000. This is in addition to any of the fees above.
However, if the lender decides to itemize the fees, they cannot charge the origination fee. Instead, they can charge any of the following fees:
- Application fee
- Processing fee
- Closing fee
- Notary fee
- Rate lock fee
- Tax service fee
- Trustee fee
This is a sampling of the fees lenders can charge, but again, they can itemize these fees or charge one point, they cannot do both.
Paying the Closing Fees
Even though the VA IRRRL is a rate/term refinance, veterans can roll their closing costs into the loan, as long as they are allowable fees. Here’s how the VA IRRRL loan amount works:
Outstanding principal balance of your current VA loan +
Closing costs +
VA funding fee =
New VA loan amount
If you want to pay the closing fees out of your own pocket, you can do that as well. That will cut down on the amount of interest you must pay for the loan. When you roll the closing costs into your loan, you pay interest on that amount for the next 15 to 30 years depending on the loan term you took. This could mean a few thousand dollars in addition to the actual closing costs.
If you pay the costs at your closing, you’ll have to prove to the lender you have the funds. You can do this by providing the last two months of your bank statements, showing the funds. The funds must be seasoned, in other words, in your account for at least that time in order for the lender to take them at face value.
The VA helps veterans secure a loan that is affordable and fair. Starting with the no down payment requirement when you buy a home, the VA continues their benefits by allowing you to refinance the loan with little verification. The limits on the allowable fees help you to keep the loan affordable, helping you get the most out of your refinance.