As published in Scotsman Guide's Residential Edition, July 2012.
Some mortgage professionals shy away from working with U.S. Department of Veterans Affairs (VA) loans because of what they think is required to originate, process and close them. But overlooking the opportunities provided by VA Interest Rate Reduction Refinancing Loans (IRRRLs), also known as VA Streamline loans, may cost you business.
These loans are easier to process and close, but you get paid just like a regular VA loan. Because many originators are not familiar with VA loans, there are several common misunderstandings about IRRRLs.
To begin, any originator can originate a VA IRRRL, and any lender can provide the loan — it doesn’t have to be the lender of the original VA loan. The loan must be a VA loan to VA loan refinance, however, and the refinance must result in a lower interest rate — unless the loans moves from a VA adjustable-rate product to a fixed-rate product.
When originating an IRRRL, make sure the loan amount does not exceed the original loan’s outstanding balance — plus allowable fees and closing costs, which can include as much as 2 discount points. More than 2 discount points are not allowed, although the borrower may pay additional reasonable discount points in cash. The borrower cannot receive more than $500 at closing, so make sure to keep this in mind when you calculate pay-offs and fees.
The loan costs can be included in the refinance, but the new payment must be lower than the original. Veterans also can add as much as $6,000 to the loan for energy-efficient-improvement costs. If refinancing or add-ons cause loan payments to increase by more than 20 percent, however, borrowers must qualify for the higher payment via traditional underwriting. In some cases, lenders may require the file to be underwritten by the VA before closing the loan.
IRRRLs do not require the certificate of eligibility that regular VA loans require; lenders can use the VA’s e-mail- procedure confirmation instead. A credit report and appraisal also are not required, but most investors want a credit report, so check with lenders for guidelines. In addition, if the mortgage currently is 30-day delinquent, the refinance requires prior VA approval. Make sure this is included in your timeline, so borrowers don’t go into further delinquency.
Often VA loans are manually underwritten, so don’t be discouraged if borrowers have derogatory credit. Underwriters are flexible because of the special circumstances that accompany being in the service. When soldiers are deployed, sent for training at a different base or even out at sea, it can cause delays that regular citizens may not encounter. The underwriter will require a letter of explanation, which should coincide with deployments.
Many think that the home has to be currently owner-occupied to qualify for a refinance, but this isn’t the case with VA IRRRLs. The only requirement is that the home was owner-occupied at some point. In addition, the parties on the new loan should be the same as the original, but there are exceptions in cases of changes in marital status or death.
The VA is making it easier for veterans to refinance current VA mortgages with today’s record-low interest rates. This program makes the file simpler to process, underwrite and close, so it may be smart to add IRRRLs to your menu of loans.
Darrin Stobaugh is a senior manager for Argus Lending in Pleasant Hill, Calif., where he also writes the company’s blog.
A 26-year veteran of the mortgage industry, Stobaugh also is the owner of DES Financial Services in San Jose, Calif. He has held positions as a regional operations manager and corporate-underwriting manager at some of the top wholesale institutions in the industry. Reach him at email@example.com.