What Is an Interest Rate Reduction Refinance Loan (IRRRL)?
An interest rate reduction refinance loan (IRRRL) is a type of mortgage offered by the U.S. Department of Veterans Affairs (VA) to veterans and military families. Also known as the VA Streamline Refinance Program, the IRRRL is a VA-to-VA-loan process, designed to allow homeowners who already hold VA loans to refinance their debt at a lower interest rate, shorten their loan term, or to convert an adjustable-rate mortgage (ARM) into a fixed-rate mortgage.
The IRRRL is also known as the VA Streamline Refinance Program because the process is relatively easy and quick. Borrowers do not need a minimum credit score or a new Certificate of Eligibility to qualify, and no home or property appraisal is necessary with an IRRRL. No minimum income is required, nor is there any restriction on how much income a borrower can make to be eligible for the VA streamline program.
Because the IRRRL refinance process is much more efficient, the program saves veterans and military families considerable effort, time, and money. However, only VA loans can be refinanced through the IRRRL program. The proceeds from the refinance cannot be used to pay for any non-VA mortgage.
How an Interest Rate Reduction Refinance Loan (IRRRL) Works
The qualifications for an IRRRL are highly relaxed—basically, applicants who already have a VA loan are pretty much approved for the refinancing. But they still need to apply to a Department of Veterans Affairs-approved lender (and since the terms of financial institutions vary, the VA encourages borrowers to comparison shop). While there is no cap on the amount a homeowner can borrow, lenders will consider the liability limits that the VA is able to assume when determining the final amount they are willing to refinance. The basic entitlement available to each eligible veteran is $36,000; lenders will generally extend up to four times that amount, depending on local county limits.
Also, the refinanced loan must represent a real financial advantage to the borrower: The interest rate on the new mortgage must be lower than the rate on the old one, or the monthly payments must be smaller. The only exception is if the borrower is converting an ARM to a fixed-rate mortgage.
The occupancy requirement for an IRRRL is more easygoing, as well, even compared to other VA loans. The IRRRL program allows borrowers to refinance homes they previously lived in but that are now investment properties, rental properties, or second homes. The property the mortgage covers does not have to be appraised in order to apply for the loan.
An Interest Rate Reduction Refinance Loan (IRRRL) can only be used to replace an existing Veterans Affairs loan.
Special Considerations for an Interest Rate Reduction Refinance Loan (IRRRL)
Unlike other federal loans, no monthly mortgage insurance is required on an IRRRL. However, these loans do carry funding fees; these vary depending on the loan, but are generally around 5%. Borrowers can forgo paying the fees up-front by rolling the processing costs into the loan amount or by accepting a higher interest rate.
The loan being refinanced must be the first mortgage on the property. If the homeowner has another mortgage that is not a VA loan, they and the lender must agree to make it a subordinated lien (more commonly known as a second mortgage), so that the new IRRRL will be the first mortgage. That way, if the borrower defaults, this loan is paid only after the VA loan's creditor recoups.