Lower Your Interest Rate With a VA Streamline Refinance Loan

Also called an Interest Rate Reduction Refinance Loan (IRRRL), the streamline refinance loan allows current VA loan holders to reduce their interest rates without all the documentation involved in a new full documentation loan. This is because the streamline refinance loan is available only for refinancing an original VA mortgage.

In order to take advantage of the VA streamline refinance, you must be a veteran with an original VA loan who used original eligibility to obtain that loan. For the refinance, any co-borrowers on the original loan must be included on the new loan. As long as all borrowers remain the same, the credit check and income verification performed for the original loan remain valid and do not have to be repeated.

Removing a borrower changes the terms of the loan and requires a new full documentation loan. You may, however, add a new spouse to a VA streamline refinance, as long as all other borrowers remain the same. The new spouse will need to pass the credit and income verifications.

Because you are not substantially changing the terms of the original VA loan, a streamline refinance does not require:

• An appraisal; you are only refinancing the amount remaining on the original loan
• Out of pocket costs; you my add closing costs onto the loan total
• Income or credit verification, unless you are adding a new spouse, who must pass these checks

You may also add up to $6,000 in home improvements to the loan total, and the property does not need to be your primary residence.

With a streamline refinance, the VA requires that your new interest rate be lower than the original, unless the refinance is replacing an adjustable rate mortgage. In addition, the VA charges only a 0.5% funding fee.

Get Cash With a VA Cashout Refinance Loan

Both current VA loan holders and eligible veterans with conventional loans can refinance with a VA cashout refinance loan up to 100% of the home’s appraised value. This option provides veterans with access to cash to meet unexpected expenses or for any other use the lender deems acceptable.

As with the VA streamline refinance, you can add up to $6,000 in home improvement costs as well as the closing costs onto the loan.

Unlike the streamline refinance, the VA cashout refinance loan must be used to refinance your primary residence, and the home must be appraised. This loan also requires a credit check and income verification.

Which type of VA refinance loan is right for you will depend on what type of loan you have currently as well as what you hope to accomplish with the refinance.

The basic VA loan guidelines are as follows:

Eligibility

To be eligible for a VA loan, you must have served at least 90 days active duty during wartime or 181 days during peacetime. You must not have received a dishonorable discharge. Reserves and National Guard personnel must have six years of honorable service.

Credit and Income

You must show sufficient income to meet the expected mortgage payments, utilities and other home ownership expenses plus enough to support yourself and your family. The VA considers your debt-to-income ratio in determining whether you can afford homeownership. This ratio is calculated by adding your expected mortgage payment to your current expenses and dividing the total by your gross monthly income. Your debt-to-income ratio should not exceed 41%.

Your credit record must be clean for the past 12 months, including timely payments on all debts. Delinquencies farther in the past are not usually held against you. If you don’t have much of a credit history, proof of on-time payments of other expenses, like rent and utilities, for the past 12 months can establish a pattern of willingness to repay credit obligations.

Chapter 7 bankruptcy must have been discharged at least 2 years previous, and Chapter 13 payments must have been made on time for the past year. In both cases, you will need to fully explain the circumstances of the bankruptcy.

You may not be delinquent on any federal debt. Foreclosures must be at least 2 years in the past, and if a VA loan was involved, full entitlement may not be available unless the loan was later repaid.

Loan Limits

The VA guarantees 25% of the total loan amount, up to a current maximum of $104,250. This means that for a loan with no down payment, the maximum a veteran can borrow is $417,000. While the VA does not actually limit the upper loan amount, most lenders will not approve a larger loan due to secondary market restrictions. However, if you can afford a down payment of 25% of the amount over $417,000, then most lenders will approve a VA loan.

Loan limits may be adjusted annually, and you can find current VA loan limits on the VA web site.

Closing Costs

The VA allows lenders to charge a 1% flat fee for processing your loan. Other fees are limited to what the VA considers reasonable and customary and can vary from 3% to 5% of your total loan amount, depending on location. You may be able to have your purchase contract structured so that the seller pays the upfront closing costs and your loan total is increased by that same amount.

Funding Fee

The VA requires a funding fee for all VA home loans in order that beneficiaries of the program help to pay for it. Currently, first-time users who make no down payment must pay 2.15% of the loan total. You can reduce the fee to 1.5% with a down payment of up to 10%, and to 1.25% with a down payment greater than 10%. Second-time users without a down payment pay 3.3%. Reserves and National Guard members pay slightly more.

Disabled veterans and spouses of veterans who died from service-related causes are exempt from the funding fee.

Occupancy

By law, all VA loans, except the streamline refinance, require the veteran to certify that he or she intends to live in the home. Generally, the veteran must occupy the home within 60 days of the loan closing date. A spouse can live in the house to satisfy the occupancy requirement for currently deployed military personnel. Other family members cannot satisfy the occupancy requirement.

The Veterans’ Benefits Improvement Act of 2008

This legislation, signed on October 10, 2008, provides additional support to veterans who may be struggling to pay their current mortgages. Now veterans with subprime mortgages can refinance into a safer VA loan and avoid defaulting. This same legislation increased the maximum refinancing loan amount to 100% of the property’s assessed value.

Your lender can help you understand how the VA loan guidelines apply to your unique situation, or you may contact your Regional Loan Center.

You may not refinance a conventional loan with a streamline refinance, and you may not receive any cash back. You are allowed to add both your closing costs and up to $6,000 in energy efficient home improvements to the loan total.

A streamline refinance does not require much paperwork because the terms of the loan, other than the interest rate, are not changing. As a result, all vetting of income and credit done for the original loan remain valid for the refinance.

Other benefits to using a VA streamline refinance loan include:

• No out-of-pocket costs; remember you can add your closing costs to the loan
• No appraisal required by the VA, although your lender is allowed to require one
• Credit checks and income verification not required by the VA, although your lender could require them
• Reduced funding fee of 0.5%
• No requirement that the property be your primary residency, although you must have lived in it previously
• The new VA loan must have a lower interest rate than the original VA loan, unless it is replacing a VA ARM loan

There are a few limitations to keep in mind when considering a streamline refinance loan:

• You can only refinance an original VA home loan
• You must keep all the original co-borrowers on the new loan
• If you are adding a new spouse to the loan, the spouse must pass income and credit checks
• Your current VA mortgage loan needs to be up-to-date, with on-time payments for the last 12 months

When interest rates drop, eligible veterans can take advantage of the VA streamline refinancing loan to lock in low interest
rates without all the documentation required for a new loan application.

To reduce delays in loan approval, break down the requirements into a checklist to follow, making sure you have completed each step. Many of the items are standard for any mortgage application, while others will ensure you loan gets backed by the VA.

Eligible Veteran

You are an eligible veteran if you were not dishonorably discharged and meet one of the following qualifications:

• Ninety days of active duty in any branch of the military, including the Coast Guard, during war
• 181 days of active duty in any branch of the military, including the Coast Guard, during peacetime
• Six years of honorably service in the Selected Reserves or National Guard

Proof of Eligibility

To prove you are an eligible veteran submit, as appropriate

• A Certificate of Eligibility or Request for a Certificate of Eligibility, DD Form 214
• A signed statement of active duty that indicates the date of your most recent entry into active duty
• Documentation proving 6 years honorable service in the Selected Reserves or National Guard
• Request any missing documentation early to allow time for processing
• If you are a disabled veteran, also submit VA form 26-8937, Verification of VA Benefits and your most current VA disability award letter

Loan Purpose is Allowed by the VA

VA loans can be used for:

• Purchasing a home you intend to live in
• Building a home you intend to live in (in the current economy, some lenders are not making these loans)
• Refinancing an existing home loan in order to:

1. Reduce the interest rate
2. Get cash back
3. Both of the above

• Purchasing a multi-family property, as long as it is no more than four units, and the veteran uses one unit as a primary residence

You may not use a VA loan to purchase other types of property.

Sufficient Credit and Income

Gather all of the following documentation:

• Employer names and address going back two years
• Pay stub showing current gross monthly salary
• W2s for the past two years
• If self-employed, submit:

1. Personal tax returns for the past two years
2. Current balance sheet for the business
3. Current income statement for the business

• Checking and saving account information, including:

1. financial institution name
2. financial institution address
3. account numbers
4. balances

• Information on any other real estate you own, including:

1. Addresses
2. Loan information

• All other creditor information, including:

1. Names of creditors
2. Addresses of creditors
3. Account numbers
4. Balances
5. Monthly payment amounts

• If your credit history includes bankruptcy, documentation proving either:

1. Chapter 7 bankruptcy was discharged at least 2 years previously
2. Chapter 13 bankruptcy payments have been made on time for the past year

• If your credit history includes foreclosure, provide all documentation pertaining to the foreclosure

In addition, ensure your debt-to-income ratio is below 41%.

Miscellaneous Supporting Documentation

You will also need:

• Estimated value of all personal property, including furniture
• All previous addresses going back two years
• Social Security number

If you have a co-borrower, you will need all the same supporting documentation for that person as well.

Following a checklist will make your loan approval process much less overwhelming. Your lender can also help you work through the required documentation in a systematic manner.

The passage of the Veterans’ Benefits Improvement Act of 2008 made this type of VA loan even more beneficial, because it increased the amount you can borrow from 90% of your home’s appraised value to 100%. The change was in response to the deteriorating economic conditions and was intended to increase the number of veterans able to refinance into a VA loan, enabling them to save money and possibly avoid foreclosure. This is especially valuable to veterans holding sub-prime mortgages, who are particularly vulnerable to losing their homes and also are less likely to have enough equity inthat home to have qualified for a VA refinance at the previous 90% limit.

In addition to refinancing at 100% of a home’s assessed value, the loan total may include up to $6,000 in energy efficient home improvements. You may also roll the funding fee into the loan.

You may use a VA cashout refinance loan to pay off any liens against the property, including:

• An original VA mortgage loan
• A conventional mortgage loan
• An FHA mortgage loan
• Tax liens
• Judgment liens

Any cash remaining after paying off the liens is available for your use.

The VA cashout refinance loan does come with the same requirements as a first-time VA loan, including:

• Verification of income
• Clean credit history for at least 12 months
• A current appraisal of the home
• Occupancy; you must certify the property is your primary residence

There are no requirements for how long you must have owned the home or held your current loan. You can even pay off delinquent loans with a VA cashout refinance. Keep in mind, though, that if you have not been making a good faith effort to make payments toward any delinquent loans over the past 12 months, you may fail the credit check.

The VA cashout refinancing loan is a valuable tool to help eligible veterans meet unexpected expenses and stay in their homes.

There are three types of loans available, fixed-rate, adjustable rate (ARM) and Hybrid ARM (HARM) mortgages. Each has advantages and disadvantages, depending on your situation.

Traditional Fixed-Rate VA Loans

The fixed-rate loan is the simplest. Your interest rate and monthly payments are set at the beginning of the loan and do
not change for the life of the loan. The advantage with a fixed-rate loan is that you avoid any surprises in the future. The
disadvantage is if rates are high when you get your loan you are locked into that high rate unless you refinance.

Traditional Adjustable Rate VA Home Loans (ARMs)

An ARM is often appealing because it starts with a lower rate than a fixed-rate loan. However, it also introduces uncertainty about your future payments, because your rate could be adjusted up or down, depending on market conditions.

When evaluating an ARM, ask about:

• The interest rate index used to set your rate: A relatively stable index can help minimize fluctuations in your payments.
• The margin: This is an amount that is added to the index to determine your true mortgage rate.
• VA rate change caps: The VA limits how much your rate can change each year as well as imposing a lifetime rate cap on your loan. In general, the annual cap is 1% and the lifetime cap 5%.
• How various future market conditions will affect future payments. Consider how payments will change both if rates remain relatively steady as well as if they increase sharply. While the future is impossible to predict, if you are unsure of your ability to afford a significantly higher monthly payment, you might want to reconsider an ARM.

Hybrid Adjustable Rate VA Loans (HARMs)

A hybrid ARM combines the fixed-rate and ARM, starting out with a fixed interest rate for the first few years of your mortgage, and then switching to a variable rate with adjustments annually.

The VA also limits rate increases on HARMs once the variable rates kick in. Depending on the length of your fixed-rate period, the caps may be slightly higher than the ARM.

The VA is currently authorized to guaranty both types of ARMs through September 30, 2012.

Lenders are not required to follow the VA’s guidelines, and are free to impose stricter requirements than those set by the VA. Most, however, are willing to follow the looser guidelines because of the VA’s backing.

You can get a new VA mortgage loan to purchase a home, or you can refinance a current loan, either a VA loan or a conventional mortgage, with a VA mortgage loan. Whether purchasing or refinancing, you have several options.

Traditional VA Fixed Rate Loans

The fixed rate loan is the simplest loan to understand. The interest rate and monthly payments are determined at the start, based in part on your credit, current market conditions and the length of the loan. They then remain the same throughout the life of the loan, regardless of what happens to market interest rates.

Because all terms remain the same, you always know how much of each monthly payment is going toward paying off principle.

Traditional VA Adjustable Rate Mortgage (ARM)

ARMs are often attractive because the initial interest rate tends to be lower than the market rate. This might be tempting, but be careful and consider what might happen if interest rates rise sharply over the next year. While the VA does limit how much rates can rise annually (usually 1%), you could still face an unwelcome surprise if your income does not keep pace. The VA also places a lifetime cap of 5% on interest rate rises.

With an ARM your interest rate and monthly payments are adjusted annually. The initial interest rate is set for 12-18 months after closing. The first change date is set in the terms of the ARM, and future adjustments occur on the same date each year.

Hybrid VA Adjustable Rate Mortgage (HARM)

With a HARM, the initial fixed-rate period is longer than one year, usually either three or five years. After that, interest rates are adjusted annually, just like with a traditional ARM.

Adjustments are also capped on HARMs, but, depending on the length of your initial fixed-rate period, the initial adjustment may be as much as 2%, with a lifetime cap up to 6%.

Graduated Payment VA Mortgage (GPM)

If you cannot afford your anticipated mortgage payments now, but expect your income to rise within a few years, you may be able to opt for a GPM. With this type of VA loan, you defer a portion of the interest that would be due each month, resulting in initial payments that are smaller than normal. The deferred interest is added to the loan principle.

Your payments rise slowly over the first few years (usually 5) of the loan, stabilizing at larger-than-normal payments for the remainder of the loan.

One potential drawback to this loan is that because you are actually adding to the total loan amount for the first few years, you will need to make a down payment. This is because the VA will only guarantee loans up to a home’s assessed value or the purchase price, whichever is less. A down payment will ensure your loan total does not grow beyond this limit.

In addition, if your income does not rise as expected, you may not be able to afford the larger payments in the future.

Growing Equity Mortgage (GEM)

With a GEM, your monthly payments increase annually, with the increase going toward paying off additional principle. The increases are either fixed amounts or variable amounts tied to an index. Either way, with a GEM, you could pay off a 30-year mortgage in as little as 15 years. GEMs are not available in all areas.

Your lender can help you decide which type of VA mortgage loan is right for you.

You can wait to apply until after you’ve found a home you like, but to avoid disappointment you might want to consider getting pre-approved for a VA loan. This way, you know how large a loan you will be able to get and you have a bargaining chip when you do find a suitable home. Sellers tend to look favorably on people already approved for a loan.

With that in mind, take the following steps when you are ready to apply for a VA loan.

Check Your Credit

Your lender will also request your credit reports, but you can avoid surprises by looking at your own reports first. That way, if there are negative items in there, you can take steps to remedy or explain them.

You are entitled to one free credit report from each of the three credit reporting agencies each year. These are available at www.annualcreditreport.com.

Calculate Your Debt-To-Income Ratio

The VA requires that this number be below 41% to qualify for a VA loan. The final calculation includes your expected mortgage payment, but you can estimate this. Divide your current expenses plus your estimated mortgage payment by your gross monthly income to determine debt-to-income.

If this number is over, or even right at 41%, create a plan to lower your ratio before you start house hunting. Keep in mind that if you have just recently lowered your debt-to-income ratio, it will take a little time to show up in your credit report, so plan ahead.

Select a Lender

Once you’ve taken care of your credit, fill out a loan application with your selected lender.

Prove Your Eligibility

In addition to the lender’s application, you will need to submit proof of VA eligibility. Some lenders can get this for you though the VA’s Web LGY system. If yours does not have access, you can submit a Request for Determination of Eligibility (VA Form 26-1880).

Your request for a Certificate of Eligibility must be accompanied by proof of service. Active duty personnel may submit a signed statement of service that includes the date of most recent entry to active duty. Discharged veterans should submit a copy of DD Form 214. If you do not have an original copy, you may submit a request for DD Form 214 either online or by mail. Be aware that it can take up to several months to get a replacement, so start this process early.

Disabled veterans should also submit a completed VA form 26-8937 and a copy of their current VA disability award letter.This paperwork will exempt you from paying the VA funding fee.

Start House-Hunting

You can, of course, begin looking for a suitable home at any time. If you wait until you know how large a loan your lender will approve, you will have a better idea of what houses to look at.

Get an Appraisal

Once you find a house you like, your lender will request an appraisal from the VA. As long as the purchase price of the home is not higher than the VA’s appraisal, you can move forward. If you were pre-approved, your next step is closing on your new home. If you did not get pre-approval, you will need to wait for final approval before you can close.

Remember, the lender ultimately approves or denies your loan, based on guidelines supplied by the VA, as well as their own loan requirements. The VA does place certain restrictions on what a lender can charge as well as minimum credit and income requirements for borrowers, but cannot force a lender to approve your loan.

In addition, even working within VA guidelines, different lenders will offer different terms and interest rates. You may want to visit several lenders to find the best loan for you.

You can set up your real estate contract to increase your purchase price by an amount equal to the closing costs and then state that the seller will pay all closing costs. This is possible because your maximum loan amount is the lesser of the appraised value or the purchase price. As long as the final purchase price, including the closing costs, stays below the home’s appraised value, your VA mortgage loan can include your closing costs.

Allowed Fees

The VA allows lenders to charge what it considers reasonable and customary fees. The most common of these include:

• Appraisal and Compliance Inspections: The VA supplies an appraiser and compliance inspector. You must pay the fees associated with these inspections.
• Credit Report: Your lender will request a credit report before approving your loan, and you must pay the associated fees.
• Recording Fees: These are fees involved in creating a legal record of your contract.
• VA Funding Fee: This is a fee charged by the VA to help pay for the VA loan program. Disabled veterans are exempt from this fee.
• Loan Origination Fee: You lender will charge a flat fee, usually limited to 1% of the loan amount, for processing your loan.
• Hazard Insurance: If your home is in an area requiring hazard insurance, including a flood zone, you’ll need to prepay this insurance.
• Flood Zone Determination: This assesses your home’s location to determine if flood insurance is necessary.
• Survey: Many lenders will require a survey, and you are responsible for the cost.
• Title Search: A check of the home’s title to ensure that the seller has a clear right to transfer ownership of the property.
• Title Insurance: Protection for you and the lender in the event that the title search missed any legal problems with the title.
• Taxes/Assessments: You may need to make an initial deposit for current year taxes and assessments.
• Special Mailing Fees: These fees for Express Mail or other special mailing charges apply only to refinancing loans. Postage and mailing charges are not allowed for any other type of VA loan.
• Local/State Fees: Some areas charge transfer taxes or other fees to borrowers. As long the VA deems them reasonable and customary, you must also pay them.

Fees Not Allowed

• Loan closing or settlement
• Document preparation
• Attorney services (except title work)
• Photographs
• Escrow fees
• Notary fees
• Loan application or processing fees
• Tax service fees
• Any third party fees

Fees for these services are covered by the lender’s 1% fee.

Always review the fees your lender is charging, and if you are unsure about any of them, ask the lender to explain them or contact your Regional Loan Center for clarification.

The VA offers two types of refinancing, and the one that is best for you will depend on what you are trying to accomplish.

VA Cash Out Refinance

If you need to make repairs to your home, remodel, consolidate debt, or just need cash for an unexpected expenditure, a VA cash out refinance is the answer.

The Veterans’ Benefits Improvement Act of 2008 improved this option by increasing the maximum loan amount to 100% of the appraised value of your home (previously you were limited to 90%). The VA made this change in an effort to help more veterans refinance through the VA and save money or even avoid foreclosure after the housing market meltdown.

In addition, you may add the funding fee and up to $6,000 in energy efficient home improvements to the loan amount.

Additional requirements for a VA Cash Our Refinance include:

• Income verification.
• Good credit history for 12 months.
• Current appraisal of the home.
• Proceeds must first go toward paying off your original VA loan. Any additional funds are available for any use your lender deems acceptable.

VA Streamline Refinance Loan / Interest Rate Reduction Refinance Loan (IRRRL)

With an IRRRL you can refinance your current mortgage to a VA loan with a lower interest rate, but you cannot get additional cash back. This option is available only to veterans refinancing a VA home loan. You may not refinance a conventional loan with an IRRRL.

Although you cannot receive cash back, you can still add closing costs and up to $6,000 in energy efficient home improvement costs to the total loan amount.

Benefits of an IRRRL include:

• The new loan must be at a lower interest rate than the original VA loan. The exception is if you refinance a VA ARM loan to a fixed rate VA loan, which may increase interest rates.
• No out-of-pocket costs.
• No appraisal; although not required by the VA, your lender may still require one.
• No income verification or credit checks; again, your lender may require one or both.
• 0.5% funding fee.
• No need to certify you intend to occupy the home, only that you have occupied the home previously.

Refinancing with a Second Mortgage

Your VA loan must always be a first mortgage. If you have a second mortgage, the company holding that mortgage must agree to this stipulation before you can refinance.

Interest rates are at historic lows, so now is the time to consider taking advantage of the benefits of a VA refinance loan.