VA borrowers who want to refinance with an FHA Streamline loan, AKA the Interest Rate Reduction Refinancing Loan, are subject to certain VA requirements for the new mortgage. The new loan must result in a reduced interest rate and/or monthly payment. This is known as a “net tangible benefit” to the borrower and is the whole reason for a VA IRRRL; the loan is intended to help borrowers better afford to pay their monthly payments.
In some cases, the “net tangible benefit” rules for lower interest rates or monthly payments are different. This is true for IRRRLs that feature energy-efficient improvements (a topic to be covered in a future blog post), and for VA Adjustable Rate Mortgages or ARM loans.
Take a look at what Chapter Six of the VA Lender’s Handbook says under the VA IRRRL section:
“c. Payment Decrease/ Increase Requirements The principal and interest payment on an IRRRL must be less than the principal and interest payment on the loan being refinanced unless one of the following exceptions applies:
• the IRRRL is refinancing an ARM,
• term of the IRRRL is shorter than the term of the loan being refinanced, or
• energy efficiency improvements are included in the IRRRL.”
Why does the VA provide an exception for the VA ARM loan in particular? The answer, from the VA loan rules:
“A significant increase in the veteran’s monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:
• financing of closing costs,
• financing of up to two discount points,
• financing of the funding fee, and/or
• higher interest rate when an ARM is being refinanced.”
Note the final bullet point in that list–the higher interest rate on an ARM loan when being refinanced. Why is this a factor? An adjustable rate mortgage begins with a “teaser rate” and increases according to the schedule agreed upon between the borrower and lender. When the borrower refinances into a fixed rate mortgage, the interest rate could be higher than the rate the borrower is currently at in the ARM loan. If VA loan rules were inflexible on the net tangible benefit requirement across the board, VA ARM borrowers would be left out of the IRRRL option. Flexible rules in this area allow ARM loan borrowers to consider refinancing with a VA Streamline Refinancing loan.
Do you have questions about VA home loans? Ask us in the comments section.
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