Veterans have the option to use their home loan benefit when buying a home. If they do, they also have the benefit of refinancing with even more benefits. The VA loan itself is known for its flexible guidelines and no down payment requirements. Once you have a VA loan, you can refinance to get a lower rate or change your loan’s term with very little verification required.
The loan is called the VA IRRRL or Interest Rate Reduction Refinance Loan. This loan helps veterans refinance just to improve their situation. Lenders don’t have to verify your income, assets, credit score, or even the value of your home. As long as you have a timely mortgage payment history and you benefit from the refinance, you are in good shape.
Just like the VA limited your closing costs when you bought the home, they’ll do the same thing when you refinance with the VA IRRRL.
The Fees the VA Allows
Lenders are able to charge the following fees without issue on the VA IRRRL:
- Loan Origination Fee – This is usually a percentage of the loan amount. You’ll usually see 1 point or 1%, which means 1% of the amount you borrow.
- Discount Points – This is also a percentage of your loan amount, but this fee helps buy you a lower interest rate.
- Title Fees – Even though you had title work done when you bought the home, any lender will require it again just to make sure there aren’t any new liens on the property
- Flood Zone Determination Fees – Lenders need to employ a third-party service to determine if your home is in a flood zone. If you are, you will have to secure flood insurance to protect yourself and the lender.
- Recording Fees – These are fees the county charges to record the new mortgage in your name.
- VA Funding Fee – This fee goes directly to the VA, just like when you bought the home. This time around, though, it’s only 0.5% of the loan amount versus 2.15% when you bought the home.
The Fees the VA Doesn’t Allow
The VA has one strict rule when it comes to the fees on the VA IRRRL. You can pay either the origination fee or itemized lender fees. If a lender charges an origination fee, they cannot itemize their fees. If they don’t charge an origination fee, they can itemize the charges, but they can’t exceed 1% of the loan amount, so it comes out the same either way.
Some of the fees that lenders generally charge that they can’t if they charge an origination fee include:
- Application fees
- Underwriting fees
- Processing fees
- Rate lock fees
- Commitment fees
If the lender charges you an origination fee, they cannot charge you any fees that you would pay directly to them. This excludes fees that you would pay to a third party, such as the credit reporting agency or appraiser.
The VA also only allows lenders to charge a maximum of 2 points for a discount fee. But there’s an exception to this rule. The 2% rule is for the fees that you roll into your loan amount. The VA does allow borrowers to roll the ‘allowed closing costs’ into their loan. This may increase your principal balance, but it will cover the closing costs if you don’t have the money to pay them upfront.
If you want to pay more than the 2% discount fee, you may be able to, you just have to pay it out of pocket. In other words, you can only roll in 2% of your loan amount for a discount fee. If you want to pay a higher discount fee, you’ll have to pay the difference at the closing.
The VA is strict about the fees that you can pay on your VA IRRRL in order to make sure the refinance makes sense for you. If the closing costs are thousands of dollars, it may not make sense for you to refinance. By the VA limiting what you can pay, you have a better chance of benefiting from the refinance and saving money over the life of the loan.