by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
A VA Interest Rate Reduction Loan (IRRL) is a streamlined refinance mortgage which allows veterans to lower their interest rate and payment without an appraisal, income qualification, or assets documentation. It is a simple process which, over the years, has been subject to lender overlays but still offers veterans a chance to save money on their mortgage.
Basic rules are:
1- the VA loan must be seasoned with a minimum of 6 monthly payments AND at least 210 days from the first payment date. This means that, if a veteran closed his/her loan in November 2019, with a first mortgage payment date of January 1, 2020, the veteran wouldn’t be able to close on the VA IRRL until July 29, 2020. While the June payment would have been the 6th consecutive payment, the 210-day period extends through July 29.
2- When a veteran makes a VA IRRL application (sample), he/she would skip the income, assets, and liabilities section. While it is not a VA requirement, most lenders want to know that one or both borrowers are employed so we encourage veterans to include their current employment information on the application.
3- the loan processor will ask the veteran and co-borrower to provide a copy of the old note, a copy of identity documents to comply with the USA-PATRIOT Act , a copy of the current mortgage statement
4- right after the application is made, a mortgage loan originator may present 2-3 options for the VA IRRL (sample), showing the inverse relationship between rates and fees. Quick rules of thumb for a VA IRRL are:
- the rate must drop at least .5%. If a veteran has a current mortgage rate of 3.25%, the rate offered must be 2.75% or lower
- closing costs, including the VA funding fee of .5%, must be recovered through the monthly savings within 36 months (disabled veterans are not charged a VA funding fee. Thus, their savings are greater than veterans who do not have a VA-rated disability)
5- Once the veteran selects the rate and closing costs scheme, the loan terms are locked and loan disclosures are sent (this must happen within 3 days of application). The veteran can sign those loan disclosures electronically
6- Those loan disclosures and documentation are submitted, along with a preliminary title report, to the lender’s underwriter for loan approval. Once the loan approval is issued, a closing disclosure is sent to the veteran and co-borrower to sign. The closing disclosure should match the loan estimate issued in the initial disclosure package and, if it doesn’t, deviation from that estimate should be explained.
7- Final VA IRRL documents can be signed, at least 3 days after the the closing disclosure was signed. Owner-occupied transactions have a 3-day right of rescission and won’t be funded until that rescission period has expired
How have mortgage forbearances affected VA IRRL s ?
VA credit guidelines require the mortgage payment to be current but allow for late payment (s) in the most recent 12 months. Most (if not every) lender(s) however, require the loan processor and underwriter to verify that the veteran’s last 6 monthly payments were made in a timely fashion (not 30 days late). This means that, if a mortgage forbearance was offered and accepted, meaning the veteran skipped payment (s) , he/she would be ineligible for the VA IRRL. If the veteran “cured” the deferred payments by bringing the mortgage current, he/she would not be eligible for the VA IRRL until a 6-month perfect payment history is established.
That’s not what they told me in March of 2020
Indeed. Mortgage forbearances were extended pretty liberally and borrowers were told that it would not affect their credit scores; they haven’t. What mortgage lenders failed to explain is that, while credit scores drive the rate/terms a veteran might be offered , credit history is also analyzed by the underwriter. That may sound unfair and it is. We were careful to explain to our borrowers, back when the mortgage forbearance program started, that T.A.N.S.T.A.A.F.L
It seemed illogical that lenders, and secondary mortgage market services and investors, would extend new financing to a borrower affected by the economic fall out of COVID-19. Lenders have a long memory and the economic depression of 2008-2013 weighed heavily on their minds.
What can a veteran do if he/she accepted a forbearance?
If the loan is currently in forbearance, and the veteran has the money to pay it off without causing economic hardship, he/she should bring the loan current and keep good records of timely mortgage payments. If September 2020 will be the first timely payment, the mortgage can be refinanced as early as Feb 2, 2020. Most lenders offer 60-day rate locks so the VA IRRL could be started in early December. The Federal Reserve Bank believes that mortgage rates will stay under 3% for a long period of time . Despite the opaque information offered about mortgage forbearances, a veteran still has a chance to refinance to historically low rates
