If you have an existing VA loan and want a lower interest rate, monthly payment, or both, there’s a type of VA-to-VA refinancing you should look into. Known as the VA Interest Rate Reduction Refinancing Loan (VA IRRRL), this type of VA refinance loan is made specifically for existing VA mortgages.
Borrowers should know that these loans have certain requirements-a lower rate, lower payment, or some other “tangible benefit” to the borrower is required. But the VA IRRRL also features no VA-required credit check or appraisal. The lender may require one or both anyway, but the VA does not.
With VA IRRRLs, there is no cash back to the borrower permitted, except for refunds of money paid up front for items later financed in the loan. Borrowers who choose a VA Energy Efficient Mortgage add-on to the loan may have these funds available to pay for approved energy-efficient improvements to the home, but you’ll need to discuss those details with your loan officer.
What are the “tangible benefits” to the borrower required for this type of refinancing? The VA loan rulebook says a lower rate or monthly payment is considered a benefit. The lower rates aren’t required to go and in hand with lower monthly payments or vice-versa. One or the other is considered a benefit, as is refinancing from an adjustable rate mortgage into a fixed rate loan.
The VA loan rules found in VA Pamphlet 26-7 do state that refinancing to get a shorter loan term is not considered a tangible benefit, so simply refinancing from a 30-year mortgage to a 15-year loan won’t count.
Having the goal of a lower payment is a good one, but sometimes a borrower may wish to use add-ons to the loan (such as the previously mentioned VA Energy Efficient Mortgage option). Doing so may increase your monthly mortgage payment, which is permitted under the right circumstances. From VA Pamphlet 26-7:
“If the monthly payment (PITI) increases by 20 percent or more, the lender must…determine that the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable, and include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.”
So it’s clear from these rules that the monthly payment CAN increase under a VA IRRRL, as long as certain conditions are satisfied. Talk to a loan officer about your options under the VA IRRRL program to learn more.