The VA IRRRL has two requirements. You must have on-time mortgage payments and there must be a net tangible benefit for the refinance. Typically, the net tangible benefit means a lower interest rate and/or lower monthly payment.
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What if it doesn’t, but you still see a benefit? There are a few circumstances where lenders and the VA might grant you an exception.
The ARM to Fixed Rate Refinance
Did you take out an adjustable rate mortgage when you bought your home? Many people do just to take advantage of the teaser rate that lenders offer. Now that the rate is about to adjust, though, you might be reconsidering your choice.
If you are ready to refinance into a fixed rate, you can usually use the VA IRRRL program to do so. Here’s the catch. Even though it’s called the Interest Rate Reduction Refinance Loan, you probably won’t reduce your interest rate. If you still have the teaser rate from the ARM loan, the fixed rate will likely be higher, but that’s okay.
The VA allows this because there is still a benefit – you lower the riskiness of the loan. An ARM loan is risky because it will eventually start adjusting on an annual basis. The higher payment can put you at higher risk for default. Eliminating that risk and assuming a fixed rate will help keep your payment predictable and your chance of refinancing without a lower rate more likely.
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The Lower Term Refinance
The other exception to the rule is when you refinance into a shorter term. In this case, your interest rate might decrease, which seems to satisfy the loan’s requirements. But, your payment will likely increase because you have less time to pay it off. While the higher payment might seem riskier, the shorter term is a benefit for the bank and the VA.
The bank will get their money back faster and the VA has less time they have to guarantee your loan. You also get to own the home faster without any liens on it, so it’s a win-win for everyone involved.
The One Big Rule
There’s one big rule everyone has to abide by if they are using the exception to the rule for the lower interest rate/payment on a VA IRRRL. That rule is that the payment cannot increase more than 20% from its original payment.
If the payment does increase more than 20%, there is cause for concern. Because lenders don’t have to verify income, credit score, or debt ratios for the VA IRRRL, they could be putting you in a sticky situation. What if you can’t afford the higher payment? Your risk of default just skyrocketed.
In order to combat this issue, the VA will require you to refinance with a fully verified loan. In other words, you can’t use the streamlined approach. The lender must verify that you can comfortably afford the higher payment by verifying your employment and income as well as figuring out your debt ratio.
The exceptions to the interest rate decrease requirement can be useful if you aren’t getting in over your head. If the payment does increase more than 20%, the VA is just looking out for you, making sure you can afford the higher payment. If your payment doesn’t increase that much, though, you may be able to get away with the streamlined refinance after all.
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