VA IRRRL Facts

Borrowers who apply for VA home loans are eligible to apply for a VA Interest Rate Reduction Refinancing Loan, or IRRRL, after they have made a minimum of six mortgage payments and meet other “seasoning” or minimum waiting period requirements on the original loan.

Any borrower applying for a VA IRRRL is affected by an important clause in the VA Lender’s Handbook, which states, “For all IRRRLs, the veteran must sign a statement acknowledging the effect of the refinancing loan on the veteran’s loan payments and interest rate.”

Why does the VA require borrowers to sign such a document?

Since no credit check or appraisal is required on many VA Interest Rate Reduction Refinancing Loans, the borrower’s application for the new loan carries with it some basic restrictions. The applicant can’t get cash back on the deal (that is reserved for VA cash-out refinancing loans which require a new credit check and other underwriting) and the new loan must result in a lower monthly payment and/or interest rate decrease.

These two rules have exceptions which can, should the borrower choose to take advantage of them, actually drive the monthly payments up or cause an increase in interest rates over the old loan.

A borrower who refinances from an adjustable rate mortgage may discover a higher interest rate on the new fixed-rate VA IRRRL. This can raise the amount of monthly payments and cost more over the lifetime of the loan. The security of having one interest rate instead of a fluctuation of rates and mortgage amounts due is a good trade off for those who need more financial stability, but the cost of the loan should not be overlooked even when the VA borrower is eager to get out from under an adjustable rate mortgage loan.

Where the monthly payment exception is concerned, the VA rules say, “The principal and interest payment on an IRRRL must be less than the principal and interest payment on the loan being refinanced” unless certain exceptions apply. Those exceptions include a situation where the IRRRL is refinancing an ARM, or where the term of the IRRRL is shorter than the term of the original loan.

These scenarios all by themselves can cause an increase in monthly mortgage payments, but the veteran may find even higher payments due if other financing expenses are included into the loan such as the financing of discount points, the VA funding fee or closing costs. If the borrower’s monthly mortgage payment increases by more than 20%, the lender must determine whether or not the borrower is a good risk for the added expense.

These are all reasons why the VA insists on its borrower signing statements of understanding about such issues. A VA loan applicant who is ignorant of these important details could find themselves in financial hot water; the VA wants to avoid such surprises which can ultimately be financially devastating for those unprepared for the amount of the new mortgage payments.

Always read the terms and conditions and ask plenty of questions before committing to the new loan. Find out how much you’ll be paying later as opposed to what you can afford to pay now.