VA loans provide veterans with a great way to purchase their home. As much as this program provides incredible benefits, including no down payment and flexible guidelines, there are ways to refinance down the road. The most common time to refinance is when interest rates drop, but sometimes borrowers want to refinance from a VA Arm Loan to a Fixed Rate Loan. This is always a possibility and depending on the circumstances, it still might qualify for the VA IRRRL guidelines.
What are the VA IRRRL Guidelines?
The VA IRRRL program enables veterans to easily refinance into a lower interest rate. Borrowers who stand to save money by refinancing their mortgage and who do not need to take cash out can qualify without:
- An appraisal
- Income verification
- Asset verification
- Credit scores
The lender, whether new or the original one, can authorize the loan based on the original qualifying factors on the current VA loan. The only requirement according to the VA is to ensure the borrower made their mortgage payments on time for the last 12 months. There is an allowance for one 30-day late payment during this time, but nothing exceeding the one late payment. If there are more than one late payments, the borrower must wait to refinance.
The purpose of the IRRRL program is to save borrowers money. The VA prefers to focus on the amount of money a household has left over after they make their monthly obligation payments, such as mortgage, car and student loan payments. The VA feels if you lower a borrower’s payment even without verifying their income, assets or credit, they will be able to better afford the loan. This is why the VA places so much focus on the mortgage history and nothing else.
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Refinancing out of a VA ARM Loan
What happens to borrowers who wish to refinance out of a VA ARM Loan into a Fixed Rate Loan? The interest rate increases when you refinance from an ARM to a fixed rate loan because the ARM loan usually has a lower introductory rate. If you choose to refinance while the loan still has the introductory rate, it might be hard to find a lower rate right now. The VA knows this will occur and they have guidelines pertaining to it.
Generally, you can refinance from an ARM to a fixed rate loan with the IRRRL program even with a higher interest rate. Where the VA steps in and puts further stipulations is when the new mortgage payment increases more than 20%. If this is the case, the VA and the lender require you to verify your income, credit score and other qualifying factors. They only do this to ensure you can afford the loan without difficulty, though.
The Lender’s Discretion
If you refinance from a VA ARM loan to a fixed rate loan and the payment, including the principal, interest, taxes and insurance does not exceed 20%, it is up to the lender how to proceed. Some lenders may still require you to prove loan affordability. This could mean providing income documentation along with paying for an appraisal. Other lenders may require one or the other, but not both. As long as the increased payment does not exceed 20%, the VA allows you to proceed as if it were a standard IRRRL.
Because every lender has different requirements, you should apply for the loan with several different lenders. This way you can see what each lender requires as well as what interest rates/costs they charge. You will likely find a drastic difference from lender to lender and because you know the interest rate will be higher, you should shop around to find the lowest one available to you
Should you Choose a Fixed Rate Loan?
Many veterans wonder if they should use their opportunity to refinance without verification to switch from an ARM to a fixed rate loan or not? The answer is a personal one as it depends on your individual factors. If you plan to stay in the home for the long-term, a fixed rate loan provides you with the most stability. If, on the other hand, you know you will move in the near future, you can continue to save on the interest by keeping the adjustable rate as long as it did not adjust yet. If your loan already adjusted and the payments are higher than you can afford, refinancing into the fixed rate makes sense.
Finding the VA IRRRL program which fits your needs takes a little work. Do not jump at the first offer provided to you. Many VA lenders out there can provide you with different terms and costs. Make sure the loan you decide on is the one which works for your financial situation right now as well as into the future. If you no longer like the VA ARM loan and want a more predictable payment, see if you can find a rate which will keep your payment within 20% of the current payment to avoid the extra work refinancing can create.
