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Interest Rate Reduction Refinancing Loan

DEFINITION

Term that refers to the lowering of a VA loan’s interest rate with the intent to reduce one’s mortgage payments. Also used to convert an adjustable rate mortgage into a fixed rate program.

EXPLANATION

A veteran with a current VA loan program can refinance his or her mortgage through the interest rate reduction refinancing loan (IRRRL). To refinance, the borrower must explain the reasons for the refinance, such as wanting to retain a lower rate, accessing money for repairs, or needing the money for educational purposes. Whatever the purpose of acquiring the loan, the refinanced loan cannot have a higher interest rate than the existing one, unless the loan is determined to be used for educational or home improvement purposes.

Regardless of the reason, the veteran will have to document why he or she is refinancing. Additionally, the veteran may have to supply a letter of explanation or provide documents that back up such claims. Reducing one’s interest rate is the central reason most veterans refinance. Therefore, refinancing for reducing one’s payments is the easiest way to qualify for a VA loan refinance.

Furthermore, the refinanced amount must be at or below the existing loan amount prior to the refinance. The financed amount cannot exceed the guaranteed amount, while the loan terms must remain the same.

Getting Approved for the Interest Rate Reduction Refinancing Loan

IRRRL refers to an Interest Rate Reduction Refinancing Loan. Oftentimes, this loan is called a VA loan because of the belief that all veteran loans are referred to as a VA loan.

As described above, in order for a veteran to qualify for a mortgage, the purpose of the mortgage must be to put the veteran in a better financial position. This typically requires the veteran to get a better interest rate, get cash out, or reduce their debt. The only instance when a veteran would be qualified for a loan with a higher interest rate is if they are switching from an adjustable rate mortgage to a fixed program.

It is not a requirement of the VA to base approval decisions on a borrower’s credit or the appraisal of a property, however both are oftentimes used when determining qualification. Because the purpose of VA loans and the IRRRL is to help put veterans in a better financial position, appraisals are only used when necessary or when the equity of the borrower is close to the maximum amount. Assuming the borrower has good credit and equity, the lender will typically do a BPO when determining approval for a mortgage.

A borrower can qualify for a IRRRL in many instances with no money out of pocket. The way lenders make their money wheh providing IRRRL loans is to include all mortgage costs and fees and tag them to the principal balance of the mortgage. Not all lenders offer IRRRL mortgage programs. They are not required by law to offer them.

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