The VA home loan is one of the best ways for a qualifying veteran, service member, or surviving spouse of a service member to purchase a home. The fact that they can buy a home without a down payment is great alone, but when you combine the other benefits such as low-interest rates and no private mortgage insurance charges, this is a great mortgage for our veterans. To make this program flexible, there is a VA streamline refinance (VA IRRRL) option that can be completed without an appraisal.
The VA Streamline Refinance Option
According to the VA guidelines, there is a streamline refinance program called an Interest Rate Reduction Refinance Loan, aka IRRRL. Some lenders may call it the IRRRL or the VA streamline refinance interchangeably. This is a loan that is available only to people who currently have a VA mortgage. The sole purpose of the loan is to lower the borrower’s interest rate, thereby saving them money over the length of the loan.
Loan Process is Much Simpler
For anyone that has completed a mortgage, whether for a purchase or a refinance, you know that there is a lot of paperwork involved. The lender will take the time to review your income and assets and then order an appraisal.
The streamline refinance bypasses a lot of that. Here are some of the main highlights of the loan
- Borrowers are not required to show proof of their current income
- Borrowers do not have to disclose any assets such as savings accounts, retirement accounts, stock investments or other liquid holdings
- A new appraisal is NOT required
- The closing costs that are associated with the streamline refinance can be added to the new loan amount
- Certain energy improvements can be added into the loan amount
The reduction in paperwork and requirements makes this loan a much easier process. Typically, a VA streamline refinance loan will close in a much shorter time frame than a regular purchase mortgage.
Ways to Use the VA Streamline Refinance Option
The main reason why people use the VA streamline refinance is to take advantage of lower interest rates. Mortgage rates go through cycles, and most people want to get the lowest rate possible. When the cycle of rates drops interest rates significantly below what the borrower had originally, it makes sense to refinance.
There are also other ways to use this program to the borrower’s advantage
- Change from a loan with an adjustable-rate to a fixed rate
- Change the term (lower from 30 years to a shorter-term)
- Finance the costs of making a home more energy efficient
Here is one more bonus. If a homeowner with a current VA mortgage is in an area where the property values have gone down, they can still use the Streamline Refinance to lower the rate. Since a new appraisal is not required, it does not matter if the home’s value is less than the current market value.
Basic VA Streamline Refinance Requirements
In order to be eligible for the VA Streamline Refinance, the borrowers must meet the following minimum requirements
- Must have current VA mortgage – this program is only available to someone that currently has a VA home loan. While there are other types of refinances available for people that have a USDA, FHA, Fannie Mae or Freddie Mac loan, this specific loan is not available to them.
- Type of occupancy – the borrower must currently live in the home as their primary residence. Or, the borrower must have previously lived in the home as their main residence.
- Payment must go down – The new payment on the refinance loan must be less than the payment on the old loan. There is one exception to this, see the next point.
- Moving from an ARM to a fixed interest rate – if the borrower is refinancing from an adjustable-rate loan to a fixed-rate loan, the new loan may have a payment that is higher than the old payment.
- Closing costs – in the vast majority of cases, the closing costs necessary for completing the refinance loan can be added to the loan amount. This allows the borrower to complete the new mortgage without paying for any costs out of pocket.
- Recent mortgage payments – Although the credit requirements for a VA Streamline Refinance are quite relaxed, there is one important criteria. The borrower is not allowed to have multiple payments that are beyond 30 days late within the most recent 12 months. Borrowers that have multiple 30+ days late payments will need to wait until they have made at least 12 payments on time in a row.
- Cash-out is not allowed – The purpose of the streamline refinance is to provide a lower interest rate, or better term, with a minimal amount of paperwork. For this reason, borrowers are not allowed to take out cash from the equity in their home with this specific loan.
Energy Efficiency Projects
As mentioned previously, the VA Streamline Refinance will allow homeowners to include the cost of several energy efficiency improvements to the new mortgage. Since the VA streamline refinance is designed to lower the cost of homeownership over time, it makes sense that improving the home’s ability to heat/cool and otherwise maintain a livable status would also lower the costs over time.
Here are the most common energy improvement projects that are allowed with the streamline refinance
- Replacing existing windows with more energy-friendly window panes and frames
- Adding insulation to the roof/attic area
- Caulking around all doors and windows
- Adding weather stripping around doors and windows
- Replacing a heat pump or HVAC unit with a newer model
What if the homeowner has already completed some of these energy improvements before applying for the streamline refinance? It is possible to get reimbursed for those expenses through the Streamline Refinance.
If the borrower has receipts to document the materials and any associated labor for the energy improvements, these costs can be included with the refinance loan in a way to pay back the homeowner. However, the work must have been completed no longer than 90 days from the date of closing the new streamline refinance loan.
The maximum amount allowed in energy efficiency improvements is $6,000.
FAQS About The VA Streamline Refinance
What credit score is needed? Lenders will have their own requirements for credit scores. It is best to talk to a lender experienced with VA Streamline Refinances and find out their specific credit guidelines.
Is a new title insurance binder necessary for the refinance? YES. Whenever a person buys or refinances a home, a new title insurance binder is requested. The new binder provides proof that there are no outstanding judgments or liens that can have a negative impact on the mortgage.
Am I required to use the same lender for the refinance that provided the original purchase loan? NO. You are allowed to use any lender that is approved to offer VA home loans in your state.
Am I required to request a new certificate of eligibility (COE)? The existing VA home loan shows that you have a valid COE. For this reason, a new COE will not be needed.
Will I be able to change the borrowers on the loan? The veteran that originally qualified for the loan, as well as any co-borrowers, will need to remain on the VA streamline refinance. If it is necessary to remove or add a co-borrower from the mortgage, please speak to your lender about a different type of refinance loan.
Are borrowers allowed to skip payments with the streamline refinance? NO. Do not stop making payments on the existing mortgage. You will not be skipping any payments.
People that have had a VA home loan for some time would be wise to investigate the option of getting a VA streamline refinance loan. The historically low rates that are available right now would save most homeowners a significant amount in interest over the life of their loan without the normal paperwork associated with a traditional refinance loan.
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- Important Disclosure
VA loans are only available to eligible veterans and/or their spouses.
Madisonmortgageguys.com is not acting on behalf of or at the discretion of the Department of Veteran Affairs or the Federal Government.