What is the VA IRRRL? How is it so Awesome?
The VA Interest Rate Reduction Refinance Loan (VA IRRRL) is an incredible benefit for service members that, when harnessed, can save you tens of thousands of dollars…with almost no effort! Also known as the VA streamline refinance, the lending approval process for VA IRRRLs is extremely simplified!
An IRRRL doesn’t always require a VA appraisal or going through the typical VA lender underwriting process which saves you (the homeowner) an immense amount of paperwork, fees, and time.
What is the VA IRRRL?
A VA IRRRL is used to refinance your current VA loan into another. It is a tool to improve your old VA loan by lowering your interest rate, payment, or both. You can also use the VA IRRRL to move from an adjustable-rate loan to a fixed-rate loan, which can be extremely beneficial!
The IRRRL is literally a refinance option veterans have to save themselves money. Can you imagine calling the bank and saying, “Hey, I have an auto loan with you that I’m paying 10% interest on…can you let me refinance to lower the payment to 4% for me?” Fat chance you’ll convince a bank to do this. You would have to go through another lender and absorb the loan. This isn’t impossible, but it isn’t the most convenient thing in the world either.
With the VA IRRRL, you can refinance to a lower interest rate through the same lender, and the process is streamlined for you as the veteran. I love this loan and cannot recommend it enough, especially while interest rates are extremely low like they are in mid-2020 as I’m writing this! If you can use the VA IRRRL to lock in a 30-year fixed-rate mortgage under 3% interest, you absolutely should!
The VA IRRRL Allows you to lower your term from a 30-year to 15-year mortgage if you’d like. You can tweak the term length and other factors with your VA lender to ensure you are saving the most amount of money over the course of your loan and locking in terms that best suit your specific situation.
You don’t even need a new certificate of eligibility to use the VA interest rate reduction refinance loan. I’m telling you, the VA IRRRL is as simple as it comes for mortgages.
Some of the biggest benefits of using a VA IRRRL over another loan are:
- Limited paperwork required
- VA IRRRL rates are competitively low
- Low, or no, closing costs
- Any closing costs can be rolled into the loan, which means you may have no out-of-pocket expenses to begin enjoying your newly reduced mortgage payments!
- You may be able to refinance even if you don’t have equity in the home
- Appraisals are typically not required
- There is no credit, income, or employment verification required!
How long after purchasing a home can you use the VA IRRRL?
The VA IRRRL requires a seasoning period of 210 days from the date of the first payment or after the sixth monthly payment (whichever is longer) before an existing VA loan becomes eligible for the VA IRRRL.
This law came around due to the number of predatory lenders soliciting veterans to refinance their home loans. Some lenders were so happy to execute VA IRRRLs because of their simple nature that they would talk with previous clients about refinancing quite frequently. This opened the door to what is called “churning,” where lenders essentially convince borrowers to refinance in order to earn a commission through their origination fees, even if it isn’t in the borrower’s best interest to continue extending the date of their last mortgage date.
Qualification Requirements to Use the VA IRRRL / VA Streamline Refinance
Obviously there are some requirements in order for you to qualify for the VA IRRRL. You can’t just take out a loan, not make any payments, be a turd, and then qualify for a lower payment, haha.
- You need to be current on payments with no more than one late payment over the last year.
- Your new rate and monthly payment must be lower than the previous loan’s unless you refinance from an adjustable-rate mortgage to a fixed-rate mortgage.
- You must certify that you currently or previously occupied the property.
- You must have previously used your VA loan eligibility on the property you intend to refinance.
- Also, you must not receive any cash from the VA IRRRL process.
- If you have a second mortgage on the subject property, they need to agree to remain in second position after the VA IRRRL goes through.
All in all, the qualification bar for executing the VA streamline refinance is set low. Basically, if you made your payments and abided by the VA loan guidelines for the original loan, you should be able to use this benefit.
You can use the VA IRRRL on an investment property!
Yes, you read that correctly. You can use the VA IRRRL to lower the cost of your mortgage on a rental property that you no longer live in. That is an incredible benefit, especially to those of us in the military millionaire community with multiple VA loans out on properties that we no longer live in.
Executing a VA streamline refinance is simple and can make your rental property cash flow more each month!
No Income Requirement
The VA IRRRL does not require an income or credit verification. The Department of Veteran Affairs assumes that since you qualified for the original loan and have not been missing payments, you should absolutely be able to qualify for a more affordable loan. I love this common-sense approach.
The biggest benefit to not requiring an income verification is that a veteran who exited the military and is now a college student with low or no income can still take advantage of the VA IRRRL. That is extremely powerful when you consider that your average college student wouldn’t qualify for any mortgage because of their high debt-to-income ratio.
Energy Improvement Mortgage
You can use the Energy Improvement Mortgage (EIM) in conjunction with a VA IRRRL to add the cost of some energy-efficient upgrades to your home during the VA streamline refinance process. Not all upgrades qualify, but this is a great way to reduce your mortgage payment and potentially lower your energy footprint (utility payment) all at the same time!
Downsides of the VA IRRRL / VA Streamline Refinance
As with everything in life, it isn’t perfect. There are always a few downsides to loan products, but, in my opinion, these are somewhat minimal compared to the vast benefits of using the VA streamline refinance.
You Can’t Cash-out Refinance
Unfortunately, you cannot use the VA IRRRL to take any cash out of your property. While this is a downside, there are other options to cash-out refinance your VA loan, just not with this particular product.
The Dreaded Funding Fee
You will have to pay a funding fee with the VA IRRRL, provided you don’t meet the service-connected disability waiver or any other waivers for this fee.
The funding fee for VA IRRRLs is 0.5% and wrapped into the mortgage balance. So for every $100,000 you owe on the home, your funding fee will be a measly $500. To put in perspective how minuscule this is, at 4% interest on a 30-year mortgage, $500 equates to an additional $2/month on your mortgage payment. Given the awesome benefits offered by this loan product, I’m sure you can spare an extra $2/month for every $100,000 you borrow!
Direct Mail Bait-and-Switch
This is less a downside of the VA streamline refinance and more a downside of crappy (borderline predatory) lenders. Because the VA IRRRL is such a simple process for both you and the lender, there are people who will try to get you to refinance frequently in order to benefit from the loan origination fees and/or commission.
When you receive these direct marketing mailings, such as letters or postcards, that have extremely low-interest rates listed, be wary. There is a good chance that these are too good to be true.
Lenders know that if they use the allure of an incredible rate to get you into their pipeline, you will most likely stay, even if you ultimately get quoted a higher rate. Think about it: if you’ve gone through a bunch of paperwork over the last two weeks, are you going to want to drop everything with that lender and go work with somebody else? Maybe, but not as fast as you would at the beginning of the process if they had advertised a mediocre interest rate.
Also, look for the annual percentage rate (APR) as opposed to the interest rate, because APR would be higher if they were using discount points, etc.
Consumer Financial Protection Bureau Warning Order
Consumerfinance.gov gives some great advice for navigating these offers.
Many of these solicitations that appear too good to be true promise:
- Extremely low-interest rates
- Thousands of dollars in cashback (false)
- Skipped mortgage payments (to save on paying for 1-3 months)
- No out-of-pocket costs
- No waiting period
Don’t fall prey to these unsolicited offers. Here is some advice to keep yourself safe.
The Consumer Financial Protection Bureau (CFPB) notes several red flags you can look for if you receive such offers:
- Low rates with unspecific terms: If an advertised rate does not explicitly state that it’s for a 30-year, fixed-rate mortgage, you might respond only to find out the actual rate is for a 10-year loan or that it assumes you’ll buy discount points.
- Saving by skipping payments: The VA bars lenders from claiming borrowers can use an IRRRL to free up cash because it will give them the option to skip one or two payments.
- Escrow refunds: The CFPB has received complaints from service members who were told they would receive a substantial refund from an escrow account but got much less after closing.
- Aggressive sales tactics. Some lenders may try to push you into a VA mortgage refinance and not because it is in your best interest.
Even with a law against predatory VA lending, it’s important to understand any loan offer you receive and never rush to make a decision — no matter how great the deal seems. If it looks too good to be true, it probably is.
Should you use the VA IRRRL?
Ultimately, the answer to this question is the same as any other financial question: it depends.
With that said, the VA streamline refinance is a great product that could absolutely save you tens of thousands of dollars over the course of your loan. If you can lower your interest rate, payment, loan term, and/or switch from an adjustable-rate mortgage to a fixed-rate mortgage with this streamlined mortgage product, I say “go for it!”
Just be sure you use a solid lender who has your best interest at heart and always review the terms thoroughly to ensure you are getting a deal that is every bit as good as you believe it is.
Here is my most comprehensive VA Loan article!
Also, if you want help finding a vetted VA lender and/or realtor who understands the VA loan, We’ve got your six!
Let me know in the comments, had you heard of the VA IRRRL / VA Streamline Refinance before?