This is the third part in an article series on mortgage programs for veterans. This article examines the Interest Rate Reduction Refinance Loan (IRRRL).
To read about U.S. Department of Veterans Affairs (VA)-guaranteed mortgages, see Part I of this series. For a comparison of VA, Federal Housing Administration (FHA) and conventional mortgages, see Part II of this series.
VA mortgages are refinanced, too
The VA-guaranteed Interest Rate Reduction Refinance Loan (IRRRL) was created to refinance an existing VA-guaranteed home mortgage, at a lower interest rate. It’s the VA’s version of a rate-and-term refinance. [VA Pamphlet 26-7 Chapter 6.1.a]
IRRRLs may not be used to cash out equity. IRRRL proceeds may only be applied towards:
- paying off the existing VA mortgage and paying closing costs; or
- energy-efficient improvements. [VA Pamphlet 26-7 Chapter 6.1.f]
An IRRRL may not be used to pay off liens other than the existing VA mortgage.
Additionally, IRRRLs need to replace the existing VA mortgage as the first lien on the same property. Second lien holders need to subordinate. [VA Pamphlet 26-7 Chapter 6.1.j]
IRRRLs can be either:
- fixed rate mortgages (FRMs); or
- hybrid adjustable rate mortgages (ARMs).
Generally, appraisal, credit information and underwriting are not required on an IRRRL, and lenders may close an IRRRL automatically. [VA Pamphlet 26-7 Chapter 6.1.a]
However, the IRRRL needs to have a lower interest rate and principal and interest payment than the VA mortgage it is refinancing, unless:
- the IRRRL is refinancing an ARM;
- the term of the IRRRL is shorter than the term of the existing VA mortgage; or
- energy-efficient improvements are included in the IRRRL. [VA Pamphlet 26-7 Chapter 6.1.c]
In any of these cases, the veteran’s monthly payment may increase. If the PITI payment increases by 20% or more, the lender is to:
- determine the veteran qualifies for the new payment; and
- include a certification that the veteran qualifies for the new monthly payment. [VA Pamphlet 26-7 Chapter 6.1.c]
Maximum IRRRL amount and terms
VA Form 26-8923, the IRRRL Worksheet, is used to calculate the maximum mortgage amount available on an IRRRL. The maximum mortgage amount is the existing VA mortgage balance, plus:
- late fees and late charges, if the mortgage is past due;
- allowable fees and charges, up to two discount points;
- the costs of any energy efficient improvements; and
- the VA funding fee. [VA Pamphlet 26-7 Chapter 6.1.e, g]
IRRRLs do not impact the veteran’s use of their entitlement, though the amount of the IRRRL impacts the guaranty on the mortgage.
For example, a veteran’s existing VA-guaranteed mortgage was originally made for $110,000 with a guaranty of $27,500, or 25%. The new IRRRL is for $112,000. The guaranty on the new mortgage is $28,000 or 25%, but the veteran’s entitlement use remains at $27,500.
Here’s another example: a veteran’s existing VA-guaranteed mortgage was originally made for $42,000 with a guaranty of $25,000, or almost 60% (the percentage applicable under former law). The new IRRRL is for $40,000. The guaranty on the new mortgage is $20,000 or 50%, but the veteran’s entitlement use remains at $25,000.
The maximum mortgage term for an IRRRL is the term of the original VA mortgage, plus 10 years, but not to exceed 30 years and 32 days. For example, if the existing VA mortgage is a 15-year mortgage, the new mortgage can’t exceed 25 years. [VA Pamphlet 26-7 Chapter 6.1.i]
Refinancing delinquent mortgages
As indicated above, IRRRLs may be used to refinance past-due mortgages. However, if delinquent payments are included, the mortgage amount is to be submitted to the VA for approval, even if the lender has automatic authority to make the VA mortgage. [VA Pamphlet 26-7 Chapter 6.1.g]
Before submitting the mortgage to the VA for approval, the veteran needs to provide evidence that:
- the cause of the delinquency has been resolved; and
- the veteran is willing and able to make the proposed mortgage payments. [VA Pamphlet 26-7 Chapter 6.2.a]
The following items are to be submitted in order to refinance a delinquent mortgage:
|1||The full name of the veteran and all other parties obligated on the prior loan and to be obligated on the new loan.|
|2||The VA loan number and month and year of origination of the loan to be refinanced.|
|3||The name and address of the lender proposing to make the loan.|
|4||The approximate proposed loan amount, interest rate, and term for the new loan versus the old loan.|
|5||Discount to be charged, expressed as a percentage of the loan and a dollar amount.|
|6||Statement signed by the veteran acknowledging the effect of the refinancing loan on the veteran’s loan payments and interest rate.The statement must show the interest rate and monthly payments for the new loan versus that for the old loan.
The statement must also indicate how long it will take to recoup ALL closing costs (both those included in the loan and those paid outside of closing).
|7||The appropriate certification concerning occupancy signed by the veteran or the spouse of an active duty servicemember. One of the following must be signed.“I have previously occupied the property securing this loan as my home.”
“While my spouse was on active duty and unable to occupy the property securing this loan, I occupied the property securing this loan as my home.”
|8||VA Form 26-8923, Interest Rate Reduction Refinancing Loan Worksheet.|
|9||VA Form 26-8937, Verification of VA Benefits (if applicable).|
|10||Certificate of Eligibility, or, if unavailable, a request for a duplicate certificate VA Form 26-1880, Request for a Certificate of Eligibility.|
|11||Uniform Residential Loan Application (URLA).|
|12||Explanation of the reason(s) for the loan delinquency, including appropriate documentation to verify the cause.|
|13||Documentation to verify that the cause of the delinquency has been corrected.|
|14||Credit report (in-file credit report is acceptable).|
|15||Current pay stub and telephone verification of current employment.|
|16||VA Form 26-6393, Loan Analysis.|
|17||Documentation of the cost of energy efficiency improvements to be included in the loan, if known. See section 3 of chapter 7. For cash reimbursement of the veteran, the improvements must be completed within the 90 days immediately preceding the date of the loan.|
Homebuyers on existing VA mortgages are to be the same homebuyers on the IRRRL. [VA Pamphlet 26-7 Chapter 6.1.k]
|Parties Obligated on Old VA Loan||Parties to be Obligated on new IRRRL||Is IRRRL Possible?|
|1||Unmarried veteran||Veteran and new spouse||Yes|
|2||Veteran and spouse||Divorced veteran alone||Yes|
|3||Veteran and spouse||Veteran and different spouse||Yes|
|4||Veteran alone||Different veteran who has substituted entitlement||Yes|
|5||Veteran and spouse||Spouse alone (veteran died)||Yes|
|6||Veteran and nonveteran joint loan obligors||Veteran alone||Yes|
|7||Veteran and spouse||Divorced spouse alone||No|
|8||Unmarried veteran||Spouse alone (veteran died)||No|
|9||Veteran and spouse||Different spouse alone (veteran died)||No|
|10||Veteran and nonveteran joint loan obligors||Nonveteran alone||No|
The VA does not require credit/income documentation or re-underwriting of IRRRLs when the borrower is not the original homebuyer. However, lenders may check payment history, or obtain statements regarding the new borrower’s ability to repay the mortgage. [VA Pamphlet 26-7 Chapter 6.1.l]
The veteran, or surviving co-homebuyer spouse needs to own the property, but they are not required to occupy the property as their primary residence. Thus, the IRRRL can refinance a prior home which is now an investment or second home. [VA Pamphlet 26-7 Chapter 6.1.m]
Veteran’s certification required for IRRRL
For all IRRRLs, the veteran needs to sign a statement which acknowledges the effect the refinancing will have on the veteran’s mortgage payments and interest rate.The statement is to be on the lender’s letterhead, and include:
- the interest rate and monthly payments on the existing VA-guaranteed mortgage;
- the interest rate and monthly payments on the proposed IRRRL;
- a statement indicating how long it will take to recoup closing costs paid inside and outside of closing in relation to monthly payment savings; and
- if the monthly payment increases more than 20%, the certification that the veteran qualifies for the new monthly payment. [VA Pamphlet 26-7 Chapter 6.1.d]
For example, if a veteran’s monthly payment decreases by $50, but the veteran pays $5,000 in closing costs, the recoup period is 100 months — $5,000 divided by $50.Lenders are to report all mortgages to the VA within 60 days of closing. [VA Pamphlet 26-7 Chapter 6.1.q]To read about the basic VA mortgage, see Part I of this series. For a comparison of VA, FHA conventional mortgages, see Part II of this series.