You have a VA loan but you want to refinance. You heard that interest rates dropped, so you want to take advantage of them. The good news is that you have an exceptional way to refinance. It’s called the VA Interest Rate Reduction Refinance Loan. It offers veterans a streamlined approach to refinancing.
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With just a solid mortgage payment history and a net tangible benefit (savings or less risky loan), you can refinance your loan.
As with any loan program, there are pros and cons. We take a look at them below.
The Pros of the VA IRRRL
- The lender isn’t required to pull your credit – The VA doesn’t require a specific credit score for the VA IRRRL. This means even if your credit score dropped since your original loan, you can still refinance. Keep in mind, though, some lenders may still pull your credit report. Since they fund the loan, they have the right to ask for more verification.
- You don’t need a new appraisal. The VA alsodoesn’t require lenders to order a new appraisal. They can use the original appraised value of the home for qualifying purposes. This could even mean that you are upside down on your loan but can refinance. Again, a select few lenders may still require an appraisal. If you want to avoid this step, shop around to find a lender that doesn’t require it.
- You can refinance even if you are delinquent on your loan. Technically, you aren’t supposed to have any late payments on your VA loan in order to refinance. But, the VA does allow exceptions in certain circumstances even for borrowers that will be late as of the day of closing. You have tohave a good reason and adequate proof of the reason. You also need to prove that you have overcome the issue and can stay on track moving forward.
- You don’t need to currently occupy the property. In other words, the VA doesn’t require you to certify that you will live in the property moving forward. You do have to verify that you previously occupied the property when you held your original VA loan, though.
- You can secure low interest rates with flexible guidelines. VA interest rates are often lower than conventionalloan interest rates. When you combine that fact with the flexible or non-existent underwriting guidelines, it’s a great program for veterans to use.
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The Cons of the VA IRRRL
- You’ll pay another funding fee. The VA charges 0.5% of your loan amount for the new loan as a funding fee. This fee helps the VA stay in business, guarantee 100% loans for veterans and allowing flexible guidelines, such as are available on the VA IRRRL.
- You can only use the program if you have a VA loan. Even if you are a veteran, you cannot take advantage of the VA IRRRL program unless you currently have a VA loan. If you have any other type of loan, you’ll have to refinance with the VA cash-out refinance if you want to use your VA benefit.
- You cannot take any cash out of the home. A typical rate/term refinance may allow you to take out up to $2,000 of your home’s equity. The VA IRRRL program doesn’t allow this, though. You can only borrow the total of your outstanding principal, a 2% discount fee, 1% origination fee, allowed closing costs, and prepaid interest. No cash can be given to you at the closing.
- You may add more years to your loan. If you had a 30-year loan originally and refinance into another 30-year term, you lose the years you already paid into the loan. This will prolong the time it takes to own your home free and clear if you stay in it for the long-term.
As a veteran, you do have the luxury of the VA IRRRL program, which can work in certain situations. It’s especially helpful for borrowers that took out an ARM loan initially or those that want a shorter term. Before you refinance whether it’s with the VA IRRRL program or any other program, though, determine the total cost and how it will affect your homeownership moving forward. Will it extend how long it takes you to pay off the loan? Will it cost you a lot of closing costs? Weighing these factors can help you determine how to move forward.
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