What is a VA Streamline Refinance (VA IRRRL)?
The US Department of Veteran Affairs (VA) created the VA Streamline Refinance to help veterans and active duty military members who already have a VA Loan refinance it with no out-of-pocket costs. The VA Streamline Refinance is meant to by very simple and straightforward; it converts an existing VA-guaranteed loan into a new one. Usually at a lower interest rate. Here’s more good news: less documentation is required (remember all the paperwork from your original VA loan)? The whole process will be faster this time around, hence the word streamline right in the name. Boom!
The VA Streamline is also formally know as the Interest Rate Reduction Refinancing Loan (IRRRL). You can also just shorten it down and say “VA Streamline” and everyone in the mortgage business will know what you mean. Some people just say “Earl” and that’ll work, too. I kinda like saying Earl because it has a nice ring to it.
When to Use a VA IRRL
In most cases, people start thinking about refinancing when they hear that interest rates have been inching lower. Like clockwork, folks start to search online to see if current rates are below the rate they have on their current mortgage note. When it’s lower, there’s obviously an opportunity to reduce the interest portion of your monthly mortgage payment. Like to save money? Of course you do! Guess what? VA Streamline Refinances are not only good for lowering your interest rate, but VA IRRRLs can also be used the shorten the loan’s term (e.g. change a 30-year mortgage into a 15-year mortgage). For borrowers who want to build equity faster, this is a smart move. There are several common Streamline Refinance conversion situations that make sense to consider. Here’s a rundown:
- Convert an existing VA fixed rate loan into a new VA fixed rate loan that has a lower interest rate
- Convert an Adjustable Rate Mortgage (ARM) or Hybrid ARM to a VA fixed rate mortgage to lock in a predictable mortgage payment going forward
- Convert a 30-year term to a 15-year term (or vice versa)
- Some borrowers can reduce their interest rate and shorten their term at the same time
VA IRRRLs are faster and lighter. There’s less paperwork and some entire steps of the loan process when you got your original VA loan have been eliminated. Here are the requirements that you won’t have to mess with:
- No copy of your Certificate of Eligibility (COE) is required
- No credit report is required (but lenders sometimes pull one to check the history of mortgage payements to make sure they’ve been made on-time and in-full)
- No appraisal is required
- No employment verification is required (sometimes lenders make a quick call, a verbal verification)
- No income verification via copies of pay stubs and W2s are required
- You don’t have to hunt down copies of your bank statements
VA Streamline Guidelines
- A VA Streamline Refinance is only available if the new loan’s interest rate is lower than the old loan’s interest rate – however there are a few exceptions to this rule. 1) When converting an ARM to a fixed rate loan, or 2) the IRRRL is shorter than the term of the loan being refinanced or, 3) cash is being directed toward energy efficient improvements, then higher rates are allowed.
- VA IRRRLs cannot be used to cash-out, loan proceeds can only payoff the existing VA loan and/or be applied to the costs required to obtain the new loan.
- Per the point above, out-of-pocket costs can avoided when they are rolled into the new loan, alternatively the lender can pay for them by setting a higher interest rate.
- VA IRRRLs must be VA-to-VA refinance. The loan being replaced must be a previous VA loan for which the borrower has already used their VA entitlement. IRRRLs re-use the entitlement.
- The VA Funding Fee is reduced to .05%.
- Borrowers can refinance their principal residence, second homes and investment properties but no commercial properties are allowed.
- If it’s an investment property that’s being refinanced, you must certify that you previously occupied it.
- VA loans must be senior in lien position. If you have a second mortgage, the holder must subordinate it to the VA loan.
- Borrowers can buy any reasonable number of points with cash but a maximum of 2 discount points may be rolled into the new loan.
VA Lender Overlays
While VA sets Streamline Refinance guidelines, as you know, private lenders fund and service the actual loans. Given that private lenders are putting up the money and taking some risk, they have additional underwriting latitude and may add to the list of VA requirements. For example, a VA Streamline Refinance does not require an appraisal but lenders may still impose their own internal lending guidelines and request one. Another example is pulling a tri-merge credit report (Equifax, Experian and Trans Union) to check mortgage payment history. This happens quite frequently, though credit reporting is not a VA refinance requirement. These or any other additional lender-imposed requirements are called overlays.
VA IRRRL Loan Limits
Maximum loan amounts for VA loan programs are not set by the Department of Veterans Affairs. However, all their loan programs have a natural upper price threshold that is influenced by the VA Loan Guarantee. For VA IRRRLs, the guarantee is like the other VA loan programs, 25% of the loan amount. Knowing that the VA guarantees only this specific percentage amount, lenders naturally limit how much additional risk they want to take on. To summarize, the VA backs up a portion of the loan and lenders adjust their requirements based on the remaining risk.
VA loan limits vary by county. The limit is $417,000 in most areas. Some high-priced areas (urban counties and metro areas) go up to $625,500.
What About Death or Divorce?
Things happen. Like death and divorce. These aren’t the most comfortable situation to talk about. But it’s important that these two topics are covered because they frequently come up as a part of VA Streamline Refinances. And the VA has some rules governing this situation that you will want to know. Generally speaking, the party or parties obligated on the original loan (obligor or obligors as they are called by lawyers) must be the same on the IRRRL. Clearly that’s not always possible. This gets a little complex as there are a myriad possible scenarios where the interested parties in a property can change. This chart breaks them out and does a lot of the heavy lifting to explain who is and who is not eligible to refinance with this program.
VA Refinance Fees
The whole process is setup to be less of a hassle and less costly. However, refinancing any loan — including all those under the VA umbrella — is not free. That’s the inescapable truth.
It’s also true VA loans are some of the best programs going. A zero down VA purchase loan is really tough to beat. A Streamline Refinance with no out-of-pocket expenses is also incredible. But it’s important for you to speak with your loan officer and have him or her punch up some numbers on a calculator and sort out your potential net savings from a VA IRRRL. Every time there’s a financing decision, your unique situation needs to be evaluated and you should be presented with your options. Decisions really need to be formed by data.
One nice perk of a Streamline is that VA closing costs can be rolled into the loan, getting ride of the out-of-pocket expenses. Reminder: this is no magic wand. Rolling fees into a loan doesn’t make them disappear. It merely spreads them out over the term of the loan. All the fees below should look familiar to you from when you took out the original loan. Here’s a recap of typical VA Streamline Fees.
- Origination (limited to 1%)
- Prepaid Taxes and Hazard Insurance (e.g. earthquake, flood)
- Title Examination
- Title Insurance
- VA Funding Fee
VA Streamline FAQs
Do I need my Certificate of Eligibility (COE) to get an IRRRL?
Pulling the COE again is not required. It was pulled and verified when the original VA loan was made. Your lender can automatically verify your previous loan information.
Must I use my current lender to refinance my VA loan?
You do not have to use your current lender. Any VA-approved lender can handle a VA Streamline refinance.
Can I use an IRRRL to refinance an investment property?
Yes, investment properties are eligible under the VA Streamline property requirements. For an IRRRL, you only need to certify that you previously occupied it. It does not have to be your current, primary residence.
Is the VA Streamline Refinance an option if there’s a second mortgage on the property?
You can still use a VA Streamline refinance. The Streamline loan replaces the VA loan, not the second mortgage. So the second position lien holder must agree to subordinate it and allow the new VA loan to be the first mortgage.
Is an appraisal and credit check required to get a Streamline refinance?
VA guidelines do not require an appraisal nor a credit check. However, lenders get to make their own determination about a borrower’s risk profile. Called lender overlays, additional documentation may be required.
Can I cash-out some of the equity using an IRRRL?
Nope. IRRRLs cannot be used to take out equity to pay off debts like student loans or credit cards. However, veterans may be reimbursed up to $6,000 for the cost of energy efficiency improvements if completed within 90 days of the loan closing date.