Ready to Refinance?
If you’re a VA homeowner who needs a lower house payment, the VA streamline refinance program could be a solution.
Compared to most other refinance loans, a VA streamline refinance - officially known as the Interest Rate Reduction Refinance Loan (IRRRL) - is easier to complete because there are few requirements.
The loan requires no income, employment, or asset verification, no appraisal, and credit score minimums are lenient.
Still, streamline refinancing isn't a slam dunk for every VA homeowner. Before you apply for yours, take a few minutes to learn the program's rules and whether this is the right move for you.
What is a VA streamline refinance?
The VA streamline refinance loan, or IRRRL, has a simple goal: to lower your interest rate, potentially saving you thousands of dollars over the life of the loan.
These loans are most popular when rates have fallen since you purchased or last refinanced your home.
The VA IRRRL can also shorten your loan term or change an adjustable-rate mortgage (ARM) to a fixed-rate loan. If you took out an ARM initially and are uncomfortable with the prospect of your rate increasing, refinancing to a fixed-rate mortgage can provide some peace of mind. With a fixed-rate mortgage, your principal and interest payments will stay the same - no risk of rate increases.
For some borrowers, a VA IRRRL makes sense if interest rates have dropped since they took out their VA home loan or their credit score has improved. Historically low interest rates this past year mean qualifying homeowners have an opportunity to refinance and save substantially.
But refinances can also benefit you if you paid down a lot of debt or have boosted your credit score by keeping your credit card balances low and paying all of your bills on time. Higher scores often mean better interest rates - and the possibility of thousands of dollars in savings.
VA IRRRL: How it works
Like any refinance loan, the VA IRRRL replaces your existing mortgage with a new mortgage.
But the IRRRL is more specific: It replaces a VA loan with another VA loan. If you don't already have a VA loan, you can't use this streamline refinance to lower your rate on, say, an FHA loan or conventional mortgage.
Your new VA IRRRL will pay off your existing VA loan, lowering your interest rate to current market rates. If rates are generally lower than when you got your current VA loan, you could save money.
Depending on the terms, the refinance may extend your repayment period, which could reduce your monthly payments.
Benefits of the VA IRRRL
The VA IRRRL program has a lot potential of benefits for current VA loan holders.
- Low VA streamline refinance rates
- Lower credit scores are okay
- No appraisal needed
- Low, or possibly no, out-of-pocket closing costs
- A lower VA funding fee than most VA loans
- No bank statements or proof of funds needed
- No income or employment verification required
You’re unlikely to find this combination of benefits with a conventional mortgage refinance or even with a cash-out refinance through the VA.
Who qualifies for a VA IRRRL?
Only veterans, active-duty servicemembers, and qualifying surviving military spouses can get VA loans. This loan program exists to help military families get into safe, affordable housing.
But just because you qualify for a VA loan doesn't mean you'll automatically qualify for the VA streamline refinance.
To qualify for the IRRRL program, you'll also need to:
- Have an active VA mortgage already: If you used a conventional, FHA, or USDA loan to buy your house, you can't use a VA IRRRL to refinance your home, even if you qualify for VA benefits.
- Be able to lower your interest rate: The purpose of the IRRRL program is to reduce your interest rate. If rates are higher than when you received your current loan, a VA streamline refinance may not work. You probably can't get approved unless you're switching from an ARM to a fixed-rate loan.
- Complete the waiting period: If you just closed on your current VA loan, you can't refinance - yet. You'll need to wait 210 days (7 months) after the closing day on your existing loan. Some VA lenders require longer waiting periods, so check with a few lenders on what their policies are.
- Have a good payment history: You'll need a six-month history of on-time mortgage payments on your existing loan.
How much can you finance?
When you get a VA streamline refinance, your new VA loan balance will closely resemble the balance of your old VA loan. Only the rate, and possibly the loan term, will change.
But the loan amount doesn’t have to be exactly the same. You can roll closing costs - such as the VA funding fee and your lender's loan origination fee - into your new loan, which would increase its balance some.
It’s also possible to finance up to $6,000 to your IRRRL to pay for home improvements that make your home more energy efficient. Things like insulation, new windows, and better appliances might qualify.
And if you're worried about how much of your VA entitlement the IRRRL will capture, know that your new loan will use the same portion of your VA entitlement as your old loan.
Even if your loan amount is slightly higher, your entitlement use should stay the same. For example, if you owe $250,000 on your current VA loan and want to refinance that amount plus add in your $4,000 in closing costs, you can do that without changing your current level of entitlement.
But there are some limits to how much you can finance above and beyond your current mortgage balance. For example, you can't go overboard with discount points. The VA lets you finance the cost of only two discount points to buy down your interest rate.
And, you can't cash out any equity in the process of getting a streamline refinance except for the $6,000 for energy efficient home improvements. To cash out more equity, you'd need a VA cash-out refinance or a non-VA cash-out refinance loan.
VA IRRRL closing costs
A VA streamline refinance's closing costs will include the VA funding fee, which will be 0.5% of your new loan amount. If you're borrowing $250,000, your fee would be $1,250.
The mortgage lender who issues your IRRRL can charge a loan origination fee of up to 1% of the loan amount, adding another $2,500.
You can buy down your rate with discount points, which would also add more to your closing costs but could help you save more in interest over the life of the loan. One point typically costs 1% of the loan amount and lowers your rate by around 0.125%-0.25%. The VA won't let you finance more than two points into your loan amount, but you can pay cash for more.
There is one exception, however. Your lender could require you to go through the full underwriting process if your new loan increases your monthly payment by 20% or more.
This could happen if you used an IRRRL to replace your current 30-year loan with a 15-year loan. The shorter term sets you up to save money on interest in the long run, but it also could increase your monthly payment. Your lender has to make sure you can afford that higher monthly payment before approving the loan.
VA streamline credit score requirement
There is no official credit score minimum for a VA streamline refinance. In fact, the VA doesn't even require lenders to pull credit.
That being said, most lenders will require a minimum score and a credit pull. That's because they want to make sure you are not behind on your mortgage, and to verify that you have been generally responsible with other finances.
If your credit score is low, it's worth applying anyway. You may be surprised at what lenders can consider for this loan type.
VA streamline refinance rates
Interest rates are hovering around historic lows, and VA streamline refinance rates are no exception. Because the Department of Veterans Affairs insures VA loans, lenders can offer some of their most competitive rates to VA borrowers.
If you got your VA loan a few years ago when rates were trending higher, you have a great shot at getting a better VA streamline refinance rate now.
I'm getting divorced. Can I use a VA streamline refinance to put the house in my spouse's name?
The VA streamline refinance is designed to change the loan's interest rate and loan term - not the holder of the loan. The loan holder on the original VA loan will remain the loan holder for the VA streamline refinance.
There are some exceptions, but they don't include a divorced spouse replacing the veteran as the primary loan holder. The new loan must be in the veteran's or servicemember's name because the loan depends on their VA entitlement benefit.
I fell behind on my payments. Can I still get a VA streamline refinance?
Having a perfect payment history for at least six months helps get you refinance quickly and easily. But it's possible to get a VA streamline refinance even if you've fallen behind on your current loan.
Your lender will have to go through some extra steps to get you approved. Ask your lender to look into getting "prior approval" for your refinance, and be prepared to answer questions about why you fell behind on your current loan's payments.
You may even be able to get some or all of your existing loan's late fees rolled into the new loan's balance. Doing this could increase your new loan's monthly payment, though.
VA IRRRL vs VA cash-out refinance: What's the difference?
The VA IRRRL is a streamline refinance loan designed to help lower your rate and make your mortgage more affordable.
A VA cash-out refinance has a different purpose: To tap your home equity so you can pay for home improvements, debt consolidation, or any other expenses - while also refinancing your existing loan balance, potentially at a lower rate or a different loan term.
For example, let's say you owe $200,000 on your VA mortgage but your house is worth $300,000. The difference between those two numbers shows your amount of home equity. In this case, you'd have $100,000 in home equity.
A VA cash-out refinance lets you borrow that $100,000 (minus closing costs and fees) along with the $200,000 required to pay off your existing loan. You'll use $200,000 to pay off your old loan and will pocket the remaining amount — $100,000 less closing costs.
Keep in mind, though, that not all lenders will let you borrow 100% of the home's value. While VA guidelines allow it, not all lenders do. Ask your lender if you need to borrow more than 90% of your home's value.
Of course, there are risks to cashing out the home to 100%. It means you have no equity in the home and it may be impossible to sell the home if you need to. Additionally, you'd be increasing your mortgage debt, from $200,000 to $300,000. As a result, your payments and the amount you'd be spending on interest can increase, too.
VA streamline refinance pros and cons
A VA streamline refinance could be the ideal way to lower your house payment or reduce the interest due throughout the life of your loan.
But the program has drawbacks, too. Here are some VA streamline refinance pros and cons to consider:
|No bank statements or income documentation needed - unless the refinance will increase your payment by 20% or more||Can't cash out equity - although you can get up to $6,000 to finance energy-efficient improvements to the home|
|Lower your monthly payment and possibly extend your repayment term||Only works if you have an existing VA loan|
|Can roll closing costs and funding fee into the loan||Need a history of on-time payments on current loan to qualify|
VA streamline refinance FAQs
Are VA streamline refinances good?
Yes. These loans are designed specifically for VA loan holders who want to lower their mortgage interest rate, change their loan's repayment term, and finance energy-efficient home improvements. And, in most cases, VA streamline refinance loans are easier to finalize than most other mortgage loans.
Are there closing costs with a VA streamline refinance?
Yes. You'll need to pay the VA funding fee of 0.5% of the loan amount, and your VA-authorized lender can charge an origination fee up to 1% of the loan amount. But since you won't need an appraisal, an inspection, or a new title search, closing costs will likely be lower compared to your original mortgage.
What credit score is needed for a VA streamline refinance?
The VA itself doesn't require a credit check if you're getting a VA streamline refinance and have a six-month history of making on-time payments.
But your VA-authorized lender could require a credit check anyway. If you're concerned about your credit profile - or if you just don't want a credit check - ask your lender whether it'll check your credit before you apply. If it will, try a different VA-authorized lender.
There are times when an IRRRL will require full underwriting, including a credit check. For example, if your current loan is more than 30 days past due, or if your IRRRL will increase your monthly payment by more than 20%, you will need to go through underwriting again.
In these cases, most lenders want to see a credit score of at least 580, though the VA itself doesn't set a credit score minimum.
Lower interest and lower payments
VA loans help veterans and current servicemembers buy safe and affordable homes. The VA streamline refinance program helps current VA loan holders make their house payments even more affordable.
If you think a VA IRRRL could help you, the next step is to talk with a VA lender.
Refinancing is the process of paying off your existing mortgage with a new mortgage. Typically, you refinance your mortgage to reduce your interest rate and monthly payment or change the length (or term) of your mortgage. You may also refinance to take cash out from your home’s equity.Show Me the Money!