Photo courtesy of Veterans United Home Loans
Key takeaways
Also known as a VA streamline refinance, an interest rate reduction refinance loan (IRRRL) is a type of refinance exclusively for VA loans that can lower your monthly mortgage payments.
An IRRRL does not require an appraisal or a credit underwriting package, meaning you can often get approved even with a lower credit score.
You’ll still need to pay a VA funding fee and closing costs with this type of refinance, rolling them into your loan if needed.
What is a VA IRRRL?
A VA IRRRL refinances a VA loan but without many of the requirements that apply in a typical refinance. This type of VA refinance can be a pathway to lower your monthly payments and lock in a low fixed interest rate, all the while avoiding many of the usual refinancing hassles.
“The VA IRRRL is an option that enables homeowners to refinance a previously existing fixed-rate VA home loan to a new one, typically with a lower interest rate,” says Robert Greenbaum, chief sales officer for the American Armed Forces Mutual Aid Association. “But it can also be used to convert a VA home loan with an adjustable rate to a fixed rate, making your payments more stable.”
How does a VA IRRRL work?
As its nickname suggests, a VA IRRRL is a more streamlined refinancing process than those for other loan types. That’s because an IRRRL doesn’t require a home appraisal or a credit underwriting package, meaning you can likely still get approved even if your home’s condition or your credit score/financial situation has worsened since you initially took out your VA loan.
This type of refinance also lets you roll your closing costs and funding fee into the new loan, which means you avoid paying anything upfront. Keep in mind that if you wrap those costs into the loan, though, you will still pay for them — just over an extended period as they accrue additional interest charges.
Eligibility and requirements for the VA IRRRL program
You’ll need to meet these basic requirements to be eligible for a VA IRRRL refinance. Other requirements may vary by lender. You:
Currently have a VA home loan
Currently live in the home associated with that loan, or have lived in it previously
Are using the IRRRL to refinance your existing VA loan
In addition, if you have a second mortgage on your home, you’ll need to get your mortgage lender to agree to position your newly-refinanced VA loan as the first mortgage.
“You also need to be current on your mortgage payments and in good standing with your lender to qualify,” says Greenbaum. “You are not eligible for a VA streamline refinance if you have a non-VA loan.”
VA IRRRL closing costs and fees
You won’t have to make a down payment or pay for mortgage insurance, and you are guaranteed to pay a lower fixed interest rate if you are refinancing from a fixed-rate VA loan. However, there are still expenses involved with a VA IRRRL.
VA IRRRL closing costs: You can expect to pay closing costs for the new loan, such as recording fees, title insurance, real estate taxes and other expenses. You might need to pay an origination fee, depending on the lender, but this and all other closing costs can be rolled into the loan total. Or the lender might offer you a higher interest rate if you don’t want to pay these costs upfront. Note that the closing cost fees you must pay for a VA streamline refinance are typically the same amounts you would be charged for any other type of loan.
VA IRRRL funding fees: Remember the VA funding fee you paid when you first applied for your VA home loan? There’s also a funding fee involved with a VA IRRRL. The good news is it will only cost you 0.5 percent of the loan amount. However, you won’t need to pay this fee if you meet certain qualifying conditions, such as having a service-related disability or a Purple Heart.
VA IRRRL rates: VA IRRRL interest rates fluctuate from day to day. Still, they tend to be much lower than conventional refinance interest rates. If you are considering a VA IRRRL, be sure to shop around with different lenders, as their rates and APRs can vary.
Who is a VA streamline refinance right for?
Here are some scenarios where a VA streamline refinance can be a smart move:
You want to lower your monthly payments. You can reduce your monthly mortgage payment and pay much less over the life of your loan with a lower interest rate VA IRRRL. That’s because the VA streamline refi can only proceed if you can lower your rate (unless you’re moving from a VA ARM to a VA fixed-rate loan).
You currently have an adjustable-rate mortgage. If your existing VA loan has a variable rate, your monthly bill can increase when that rate rises. A VA IRRRL can help you lock in a fixed rate.
You’re considering renting out your home. Getting an IRRRL only requires that you used to live in the home — you can move out and lease out the residence and still refinance the loan.
Pros and cons
Before you decide if a VA streamline refinance is right for you, consider the following pros and cons.
Pros of a VA streamline refinance
The VA doesn’t ask for much to prove you can qualify for an IRRRL. Usually, no appraisal or income documentation is required for a VA IRRRL, and there are no credit underwriting rules. That means you might be able to get approved for an IRRRL regardless of whether your income has gone down, your credit score has dropped or your home’s value has tanked. Less paperwork means you can likely expect a quicker approval process, too.
You can finance your closing costs into the loan. The closing costs on an IRRRL tend to be lower anyway, including a discounted funding fee, and you can wrap all your expenses in your new loan amount. This means you can refinance your home without any upfront costs.
You could pay less each month and save on interest in the long run. With an IRRRL, you might qualify for a lower interest rate if one is available. This can mean paying less interest over your loan’s term, paying a lower monthly payment or both. Also, paying less can help you build equity in your home faster and shorten your repayment.
You can convert an adjustable-rate VA loan to a new fixed-rate VA loan. The switch can save you thousands in interest over the life of the loan.
Cons of a VA streamline refinance
You can only refi via a VA IRRRL if your new interest rate is lower than your current rate. That means you may have to wait for interest rates to drop before you can pull the trigger on a VA IRRRL. The exception to this rule is if you are switching from a VA ARM to a fixed rate loan. Then the new rate may be higher, since ARMs often have low introductory rates.
You won’t be able to take any cash out with the VA streamline refinance. Unlike a VA cash-out refinance, the IRRRL doesn’t allow you to receive any cash proceeds during the loan process. This can be a major downside, particularly considering that there’s been a steep increase in equity for many as home values have risen. With an IRRRL, you won’t be able to tap into this equity to pay down debt, pay for home improvements or reach another financial goal.
You’ll still have to pay a small funding fee. The VA IRRRL has a 0.5 percent funding fee (more on this later). If you’re refinancing a $300,000 loan, for example, the fee will be $1,500.
Your lender can still require documentation. While the U.S. Department of Veterans Affairs doesn’t have any specific credit underwriting requirements, your lender can set some additional criteria. Take the time to carefully shop around and compare lenders to see what qualification requirements they have for IRRRLs.
How to get a VA IRRRL
Here are the steps involved with getting a VA IRRRL, according to the U.S. Department of Veterans Affairs:
Check if you qualify. Before pursuing a VA IRRRL, check the VA’s eligibility guidelines (as mentioned above) to see if you qualify for this type of refinance.
Find a lender. To find a lender — preferably one that specializes in VA loans — shop around among mortgage companies, private banks and credit unions (remember, the U.S. Department of Veterans Affairs doesn’t offer any loans directly). Compare rates, terms and fees carefully from at least three different lenders.
Be careful about offers that seem too good to be true. Claims that you can skip payments, receive tantalizingly low interest rates or benefit from other terms that sound amazing may be signs of a misleading offer.
Provide any needed information to your lender. Expect to give your Certificate of Eligibility (COE), which you used to receive your original VA mortgage, to your lender to demonstrate previous use of your entitlement. If you don’t have your original COE, your lender can get it electronically through the VA Home Loan program portal.
Collect documentation. In addition to your COE, you’ll also have to fill out and submit other documentation, including an IRRRL worksheet, a form verifying your VA benefits and a VA loan summary. You can find the full checklist on the VA’s website.
Follow your lender’s process for closing. Prepare to pay associated fees and closing costs. Remember that you can include these costs in the new loan instead of paying them upfront, or you can agree to a higher interest rate to offset these fees and closing costs.
Frequently asked questions about VA streamline refinances
How many times can you use the VA IRRRL?
What are alternatives to a VA streamline refinance?
