The VA Streamline Refinance allows veterans with a VA loan to refinance with little verification. The VA has very few requirements including a specific waiting period for this loan. Veterans that qualify can lower their mortgage payment without very much legwork. The process is simple, but there are some things you should know before proceeding.
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No Waiting Period
First and foremost, you don’t have to go through a specific waiting period before qualifying for the VA IRRRL. The VA does not have specific requirements regarding how long you must hold your current VA loan. However, many lenders require a minimum of 6 – 12 months before you refinance. The VA IRRRL depends on your mortgage payment history. Without much of a history, a lender will not know how well you can afford your current payment.
Shopping around with different lenders will give you better chances of approval if you recently took out your VA loan. Some lenders hold hard and fast to the 6 – 12 month rule. Others are willing to bend the rules under the right circumstances.
A solid payment history lets a lender know you can afford the higher mortgage payment. Since the point of the VA IRRRL program is to provide you with a lower payment, that’s all the lender needs from you. If you have a solid pattern of at least 6 months of timely mortgage payments, a lender may be willing to offer you a lower interest rate on a refinance.
Paying the Closing Costs
Keep in mind, every time you refinance, you pay closing costs. You will also pay a funding fee again. With the IRRRL, though, the VA only charges 0.5% of the loan amount. You can only refinance your outstanding principal balance plus any prepaid expenses. When you took out your original VA loan, you likely paid 2.15% of the loan amount. The funding fee is lower this time around, but it still exists.
If you don’t want to pay lender closing costs, you may be able to secure a ‘no closing cost loan.’ This usually results in a 0.5% higher interest rate, though. If you have enough room between your current interest rate and the new quoted rate, this could be a good option. In this case, the lender pays the closing costs for you, charging you the higher interest rate to make their money back.
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How to Qualify
The bigger question may be ‘how do you qualify for the VA IRRRL?’ Besides the fact that there is no waiting period, there are other requirements for the loan:
- You shouldn’t have any late payments. This is especially true if you have had your VA loan for less than 12 months. Borrowers who have had their loan for longer than 12 months may get away with one 30-day late payment in the last 12 months. This varies by lender though. It’s best if you don’t have any late payments at all.
- You must have a tangible benefit. Most commonly, borrowers have a lower payment. A lower interest rate means a lower payment. You can’t take more money out of your home’s equity, so the lower payment is a given. Some borrowers require you to save at least 5% or $50 per month. This varies by lender.
- You must live in the home and be able to prove it. The VA does allow some concessions to the owner occupancy rule. However, if you want to use the VA IRRRL program, you must live in the home at the time of application.
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Should you Refinance?
This is a question many borrowers ask themselves. You know you just paid all that money for your original VA loan. Even though the VA closing costs are generally lower than other programs, it still costs money. Does it make sense to do it all over again?
This is a personal decision. Generally, figuring out your break-even point helps you make the best decision. This is the point that you start reaping the savings, after paying off the closing costs. Let’s look at an example:
You have the chance to refinance and save $75 per month at the lower rate. It will cost you $4,000 to close on the loan between the closing costs and funding fee. You’ll need to figure out how long it will take to pay that off at $75 a month savings.
$4,000/$75 = 53.3 months
In other words, after 54 months you would start reaping the savings. If you know you’ll move or refinance your home before 4.5 years, it would not make sense to refinance. You would never enjoy the savings. If, however, you know you will be in the home for the long-term, then it might make sense.
Shop Around
The best thing you can do if you want to refinance after a shorting waiting period is shop around. You want to find a lender with the best combination of a low interest rate and low closing costs. Again, using the above formula, you can determine which option makes the most sense.
Each VA approved lender can quote you their own costs and rate. You may find a lender that will not charge you any points and has generally low closing costs. Sometimes it makes more sense to take the low closing costs and slightly higher interest rate. Let’s say the difference is only 0.25% in the rate. This could mean a very negligible difference in the payment from a lender quoting you a slightly lower rate. If the closing costs are lower, it may make more sense.
Take your time and figure out which loan provides you with the best options. Then you can make the most of your VA IRRRL opportunity.
