The appraisal is a large part of any loan. It’s how the lender knows how much they can lend you. For example, for the VA loan, you can borrow up to 100% of the purchase price of the home. As you can see without the appraisal, the lender would not know how much to lend you.
However, refinancing your VA loan is a little different. If you apply for the VA IRRRL program, an appraisal won’t be necessary. It sounds shocking, but you’ll see why below.
What is the VA IRRRL?
The VA IRRRL is the Interest Rate Reduction Refinance Loan. It gives veterans with a current VA loan the chance to refinance. There are two strict requirements to follow:
- You must have a timely mortgage payment history (usually the last 12 months of payments must be made on time)
- You must have a net tangible benefit. In other words, there must be good reason for the refinance. Usually, it’s a lower interest rate and/or payment, however, you can also refinance into a shorter term or out of an ARM.
Because the VA requires a timely mortgage payment history, they use that for qualifying you for the loan. They use all other qualifying factors from your original VA loan.
This means the lender does not have to pull your credit, evaluate your income, or determine the current value of your home. In other words, you do not need an appraisal.
Why is the VA IRRRL so Easy?
After hearing horror stories of other people trying to refinance, you may find it hard to believe that the VA IRRRL does not require an appraisal. Isn’t it risky for them? What if you are upside down on your loan?
The VA takes all of this into consideration, but they also consider the fact that you already have a loan that they guarantee. Because there must be a benefit for the refinance, it makes sense to let veterans secure a new loan.
Some borrowers will lower their interest rate. This will likely mean a lower payment. If they could currently afford the higher payment, the risk of default goes down even further with the new, less expensive loan. Other borrowers will refinance out of an ARM. Adjustable rate loans are risky. Once they start adjusting, the rate could increase significantly. This means a higher payment and a higher risk of default. There are other borrowers that may lower their term. While their payment may increase, they borrow the bank’s money for a shorter amount of time. This means less risk for the VA.
It’s a win-win situation for the VA when you use the VA streamline refinance. You lower the risk that the VA will have to pay funds to the bank. This allows them to guarantee more loans for other veterans in the future.
What Other VA Loans Require an Appraisal?
The VA IRRRL program is the only VA loan that does not require an appraisal. If you don’t have a timely mortgage payment history or you don’t have a net tangible benefit, you’ll need a fully verified VA loan. This is also necessary if you need cash out of the equity of your home. The VA IRRRL is strictly a rate/term refinance.
If you refinance the VA loan for any of the above purposes or from a conventional or FHA loan into a VA loan, the VA will require an appraisal.
A higher loan amount, risky payment history, or receiving cash out of the loan poses a serious risk for the VA. They need to know the value of your home to make sure you have the equity you say you do. They also need to know that the value of the home is there should the lender need to start the foreclosure process.
While the appraisal is a valuable tool for any lender, it’s not necessary for the VA IRRRL. This could save you a significant amount of money as they can cost up to $500. Plus, it gives you the chance to get a more affordable mortgage payment without verifying any other qualifying factors.
If you do need an appraisal, it’s for good reason. The VA wants to make sure you are not getting in over your head with a new loan. They want to protect you from default as much as you want to prevent it yourself.