The VA Streamline Loan is also known as the Interest Rate Reduction Refinance Loan or IRRRL. The name speaks for itself; the refinance loan is meant to help you lower your interest rate, allowing you to save more money every month. The program is available to veterans that already hold a VA loan and that are able to lower their interest rate on their fixed loan or to refinance from an adjustable rate loan to a fixed rate loan. Since the VA is very into ensuring that our veterans can afford not only their mortgage, but their daily living expenses too, this program is very helpful in getting you to that point.
Basic VA Streamline Mortgage Guidelines
The basic requirements of the VA Streamline Loan are similar to those of the original VA loan you obtained. The first step is ensuring that you are entitled to the loan, which if you have a VA loan now, you are entitled. Because you can only use that benefit once at a time, you will be reusing the same benefit that you used to obtain the original loan. The refinance must be on the same loan you obtained with the benefit and you must only refinance into another VA loan. The same Certificate of Entitlement you used on the original loan will be used to qualify you on this loan as well.
As with most streamline loans, the requirements for the VA Streamline Loan are very simple. One key difference in the requirements for the IRRRL is that you cannot use the proceeds of the new loan to pay any other loans, including a second mortgage. If you have taken out a subsequent mortgage on the home, the lender for that loan will have to agree to subordinate, or take 2nd position, in order for you to qualify for the program and to use your benefit again. In addition to that unique requirement, the following stipulations must be met:
- Your credit history must be clean for the last 12 months. For qualification purposes on this loan this means that you cannot have more than one 30-day late payment in the last 12 months. The VA is not concerned so much with the score that is reporting on your credit report, but more the history that is reporting. If there are more than one late payments, you will have to wait until you are 12 months out from the last late payment in order to qualify. Some lenders will have a minimum credit score that they will allow for the program, but every lender is different in that respect, so shop around if one lender does not approve your credit score.
- You will not need to obtain a new appraisal, as the lender can use the original appraisal used to purchase the home. This is good news for many homeowners that are currently underwater on their loans, enabling them to refinance into a lower rate and possibly gain equity back in the home faster. It is important to note that many banks will still require an appraisal, so if you are underwater, you may need to shop around with other lenders.
- Your employment status is not typically an issue when applying for the VA Streamline Loan. The VA does not require you to provide W-2s or paystubs since you are supposed to be lowering your payment, making it more affordable than your current loan. Some lenders will implement an overlay just to protect themselves and to ensure that you are gainfully employed before providing you with the new loan though.
- In general, you should live in the home you are trying to refinance with the IRRRL program, but it is not a necessity per se. The lender and VA will use their own discretion to determine if you still qualify if you no longer live in the home. Everyone has to provide proof of occupancy prior to applying for the refinance however. An example of a veteran that does not need to be living in the home to qualify is one that had to relocate for his job and is now renting out the home that has the VA financing.
VA Streamline Maximum Loan Amount
The loan amount for the VA Streamline Loan is reserved for the outstanding principal plus any closing costs, the funding fee, and any outstanding fees on the current loan. The exception to this rule is any borrower that wants to make energy efficient changes to their home. The changes must be completed within 90 days prior to the closing of your IRRRL. The cash you receive in hand will be a direct reimbursement of the energy efficient changes you made.
VA Loan Funding Fee
The funding fee is a standard fee charged on every VA loan unless you became disabled in the line of duty. For the VA Streamline Loan, the standard funding fee is 0.5% of the loan amount. This amount can be paid in cash at the closing or can be rolled into your loan amount along with your closing costs from the lender and title company in order to minimize the burden that the refinance puts on your finances.
Increased Payment after IRRRL
In some rare cases, your payment will go up as a result of the IRRRL, but is often for good reason. The following examples showcase when a payment may go up and still get approved by the VA:
- Changing from an adjustable rate to a fixed rate – This is the most common reason for a payment to increase. Adjustable rates are often lower than the fixed rate initially, but they are also much riskier because of their ability to change yearly and with no prediction on how they will change. As long as the new payment does not exceed a 20% increase, nothing different will need to be done. If it does exceed 20%, chances are you will need to prove your income, employment, and possibly have an appraisal completed.
- Changing from a 30-year term to a 15-year term can also increase your rate since the amount of principal you pay each month will increase. Because a lower term is less risky than a longer term, the payment increasing is typically approved by the VA and the lender.
- Energy efficient changes are also considered an acceptable reason for an increased payment since the energy efficient changes are supposed to help lower your utility bills and possible repairs around the home, increasing your disposable income.
In general, as long as you are lowering your payment or decreasing the riskiness of your loan and refinancing from one VA loan to another the VA Streamline Loan is easy to obtain as the VA wants to make your mortgage payments as easy as possible to afford. Remember, if one lender turns you down, don’t be afraid to shop with other lenders as each bank will have different requirements that they use in addition to those that the VA has set up.