VA Refinance Basics

VA offers 3 types of refinances: IRRRL (Streamlines), Rate and Term, and Cash Out refinances.

IRRRL (Streamlines):

Note: IRRRLs can only be used to refinance existing VA guaranteed loans.

The VA streamline refinance is very similar to the FHA Streamline in that there is no income qualifying. The veteran’s income is not included on the 1003 (the employment information is). There is no credit history required the veteran must just be current on their payments at the time of closing. Many lenders however require a 12 month mortgage rating/mortgage history and allow no more than 1 30 day late payment in the last twelve months. Some lenders have additional restrictions or pricing adjustments do to credit score even though the VA does not require any credit score qualifications. There is no appraisal required on a VA Streamline. However certain lenders may require AVMs (Automated Valuation Models) to be pulled. In most cases the lender just wants to see the AVM come in at or above the new loan amount. Generally speaking though the VA has no LTV requirements for Streamlines.

An IRRRL (which can be a fixed rate or an ARM) must have a lower interest rate than the VA loan being refinanced, unless the original loan being refinanced was an Adjustable Rate Mortgage (ARM) and you are moving them into a Fixed Rate Mortgage (FRM).

A Streamline Refinance may only be done on an existing VA loan. If a veteran wishes to do a Rate and Term VA Refinance but is not currently in a VA loan he/she must do a Full Qualification Rate and Term VA Refinance.

The Principle and Interest (P&I) portion of the payment must be lower than the P&I on the loan being refinanced, except in the following circumstances:

• The IRRRL is refinancing an ARM
• The term of the IRRRL is shorter than the term of the loan being refinanced
• Energy Efficient Improvements are included in the IRRRL.

An Increase from the P&I of the original loan of 20% or more may require the lender to re-qualify the veteran based on his current income and credit.

The minimum guaranty from the Veterans Administration to the Lender on an IRRRL is 25%. If the borrower is currently in a Chapter 13 Bankruptcy, approval from the Bankruptcy trustee must be obtained in order to complete the Streamline Refinance.

The term of an IRRRL may not exceed the original term of the loan being refinanced by more than 10 years.

The following Costs may be included in an IRRRL:

• The VA Funding Fee
• All Allowable closing costs, including the origination fee and up to 2% in discount points.
• The Payoff balance on the current VA loan including interest due and late charges.

Streamline Refinances do not allow cash back. They do not allow the consolidation of a first and a 2nd mortgage even if the 2nd was a purchase money 2nd. The maximum in incidental cash back to the borrower is limited to $500.00.

The Veteran does not have to provide the COE when requesting an IRRRL. Instead a Prior Loan Validation must be pulled through the Veteran’s Information Portal Online System.

Did you know????: Interest Rate Reduction Refinancing Loans (IRRRL’s) were authorized in 1980.

VA CASH OUT REFINANCE:

VA Cash out transactions require full credit, LTV, and income qualifying. The Veteran can now borrow up to 100% of the appraised value of the home plus the VA Funding Fee. Most lenders however are still going off of the 90% LTV rule. As of 1/3/09, Only Met Life Home Loans and Freedom Mortgage Corp are currently offering 100% VA Loans.

*Due to State law, the maximum loan amount is limited to 80% in the state of Texas if the borrower receives cash proceeds. Currently even though the VA allows cash out in Texas, many lenders are not willing to make cash out loans of ANY type in Texas due to excessive risk of litigation.

Other VA Refinances:

Certain transactions that may offer “no cash back” to the veteran and would not qualify as an IRRRL may still be considered as a VA Refinance. These transactions include:

• Payoff of construction loans
• Payoff of Land Contracts, or Lease Options ( if recorded on title, otherwise the transaction would be done as a purchase)
• Loans assumed by veterans at interest rates higher than current market rates
• A no cash out refinance from a conventional or FHA loan into a VA loan.

These Refinances are subject to full credit, LTV, and income qualifying.

VA FUNDING FEE (VAFF):

The VA Funding Fee charged for a loan transaction will vary depending on the veterans military status, purpose of loan, and LTV. A Table for calculating the VA Funding Fee may be found at http://www.homeloans.va.gov/ls.htm or in the 2008 VA Handbook page 41.

The law requires that VA be paid a funding fee on guaranteed loans. The only exceptions are loans made to:

• Veterans receiving VA compensation for service-connected disabilities (approximately 1 in 3 US Veterans have a disability rating with the VA so be sure to ask about this on every loan.)
• Veterans who would be entitled to receive compensation if they were not receiving military retirement pay.
• Loans made to surviving spouses of veterans who died in service or from service-connected disabilities.

Veterans whose entitlement is based on active duty will pay a 2.15% fee on their first VA loan and 3.30% on all future loans for the purchase of a home or cash-out refinances.

Veterans whose entitlement is based on Guard/Reserve service will pay 2.40% on their first loan and 3.30% on all future loans for the purchase of a home or cash-out refinances.

A down payment will reduce the amount of the funding fee (see chart).

The funding fee on VA Assumptions and Interest Rate Reduction Refinance Loans is currently 0.5%. This rate remains unchanged regardless of the number of times it is used.

The funding fee may be financed into the loan amount (over and above the appraised value of the property).

VA Loan Occupancy:

The veteran must certify that he or she intends to personally occupy the property as his or her primary residence within 60 days of closing.

TFor an IRRRL, the veteran may certify that he or she previously occupied the property.

ENERGY EFFICIENT MORTGAGES: (Lender’s Handbook, Chapter 7, Topic 3)

TEnergy Efficient Mortgages are loans for:

• The acquisition of an existing dwelling, and the cost of making energy efficiency improvements to the dwelling,
• Refinancing an existing VA loan with an IRRRL and including efficiency improvements,
• Energy efficiency improvements to a dwelling already owned and occupied by a veteran.

TThe mortgage may be increased by:

• up to $3,000 based solely on the documented costs of the energy improvements; OR
• up to $6,000 provided the increase in the monthly mortgage payment does not exceed the likely reduction in monthly utility costs; OR
• more than $6,000 subject to a value determination by VA.

TVA will guarantee an energy efficient mortgage in the same proportion as a loan not including energy efficiency improvements. However, the charge to the veteran’s entitlement will be based upon the loan amount before adding the cost of energy efficiency improvements. The funding fee must be calculated on the full loan amount, including the cost of the energy efficiency improvements.

RESTORATION OF ENTITLEMENT: (Lender’s Handbook, Chapter 2, Topic 6)

To qualify for restoration of entitlement, one of the following requirements must be met:

• The prior VA loan must be paid in full and/or the property disposed of, OR
• The prior VA loan must have been assumed by an eligible veteran who substituted his/her entitlement.

Note: Lenders should request restoration prior to closing the new loan. Lenders are also encouraged to research the veteran’s prior loans to confirm those loans using VA entitlement.

DOCUMENTS REQUIRED FOR RESTORATION:

• VA Form 26-1880, completed, signed and dated by the veteran.
• Evidence that previous loan is paid in full.
• Proof of Service

SPECIAL ONE - TIME RESTORATION: Home loan entitlement may be restored one time only, if the veteran has repaid the prior VA loan in full, but has not disposed of the property securing the loan.

After such a restoration, any future restoration will require the veteran to dispose of all property financed with a VA loan, including the property not disposed of under the “one time only” exception. Documentation requirements are the same as those listed above.

DIVORCE CASES: When property is awarded to the veteran’s spouse as a result of divorce, entitlement cannot be restored unless the spouse refinances the property and/or pays off the VA loan in full or the ex spouse is a veteran who substitutes their entitlement.