How to refinance with a VA Interest Rate Reduction Refinance Loan (IRRRL) — eligibility, the 0.5% funding fee, the net tangible benefit and seasoning rules in 38 U.S.C. 3709, and how to compare offers
An Interest Rate Reduction Refinance Loan replaces an existing VA-backed home loan with a new VA-backed loan at a lower interest rate, or moves an adjustable-rate loan to a fixed rate. You must already have a VA-backed loan on the home, be refinancing that loan, and certify that you live in or used to live in the home; a second-mortgage holder must agree to stay in second position. The loan comes from a private lender, not VA, and closing costs — including the 0.5% VA funding fee unless you are exempt — can be included in the loan or covered by a higher rate. Federal law (38 U.S.C. 3709) protects borrowers: the lender must show that all fees and costs will be recouped through the lower payment within 36 months, the rate must fall by at least 0.5 percentage point fixed-to-fixed (2 points fixed-to-adjustable), and the loan cannot close until 210 days after the first payment was due and six payments have been made. VA warns about refinance offers that promise skipped payments or rates that sound too good to be true.
What you'll need
- Your current mortgage statement (rate, balance, payment history)
- The Certificate of Eligibility used for the original loan, or let the lender retrieve it through VA's portal
- Loan Estimates from each lender you compare
- If exempt from the funding fee: your VA award letter showing compensation for a service-connected disability
Step-by-step
Step 1: Confirm you qualify
All of these must be true: you already have a VA-backed home loan; you are using the IRRRL to refinance that loan; and you can certify that you currently live in, or used to live in, the home. A VA-backed loan is one closed with your VA entitlement — check the note or ask the servicer. You do not need a new appraisal or a new credit underwriting in most cases, and you do not need to re-establish entitlement; the lender documents prior use with your original COE or electronically.
Reference: https://www.va.gov/housing-assistance/home-loans/loan-types/interest-rate-reduction-loan/
Step 2: Know the statutory protections
38 U.S.C. 3709 requires: (a) recoupment — all fees and costs of the refinance (excluding taxes, escrow amounts and the funding fee) must be recovered through the reduced monthly payment within 36 months; (b) net tangible benefit — the new rate must be at least 0.5 percentage point below the old rate when both are fixed, or at least 2 points below when refinancing a fixed-rate loan into an adjustable-rate loan, with limits on how much discount points can be financed; and (c) seasoning — the new loan may not close before the later of 210 days after the first payment on the existing loan was due and the date six monthly payments have been made. A lender must show you the recoupment calculation.
Step 3: Understand the costs
The VA funding fee on an IRRRL is 0.5% of the loan amount, payable at closing or financed. You are exempt if you receive VA compensation for a service-connected disability, are eligible for compensation but receive retirement or active-duty pay instead, receive DIC as a surviving spouse, have a proposed or memorandum rating before closing, or are on active duty with a Purple Heart; a fee paid before a retroactive award can be refunded. Lender charges, title and recording fees are added; you can include them in the new loan or take a slightly higher rate so the lender pays them. Divide the total costs by the monthly savings to see your own break-even point.
Reference: https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
Step 4: Compare lenders and apply
Terms and fees vary, so get Loan Estimates from several VA-approved lenders — including your current servicer — and compare the rate, the total closing costs and the recoupment period on the same day. Give the lender your original COE if you have it; otherwise the lender obtains it. The lender handles the title work, the occupancy certification and closing. Be careful with unsolicited offers: VA's own warning covers claims that you can skip payments, get very low rates, or receive cash back — IRRRLs cannot be used to take cash out beyond limited allowed amounts.
Reference: https://www.va.gov/housing-assistance/home-loans/loan-types/interest-rate-reduction-loan/
Step 5: If you need cash or do not have a VA loan
An IRRRL is only for an existing VA-backed loan and only to lower the rate or payment volatility. To take equity out, or to refinance a conventional or FHA loan into a VA loan, use a VA-backed cash-out refinance, which requires full underwriting, an appraisal and a higher funding fee (2.15% first use, 3.3% subsequent use, with the same exemptions). If you are behind on your VA loan, call your servicer and a VA loan technician at 877-827-3702 before refinancing; VA has options to avoid foreclosure.
Reference: https://www.va.gov/housing-assistance/home-loans/loan-types/cash-out-loan/
Critical tips
- A refinance resets the loan term; compare the total interest over the life of each loan, not only the monthly payment.
- If you bought with a down payment of 5% or more, your original funding fee was lower; the IRRRL fee is a flat 0.5% regardless.
- Keep the Closing Disclosure and the recoupment statement; they are the record if a lender's promise does not match the loan.
- A county veterans service officer can confirm your funding-fee exemption and help request a refund if VA later awards compensation with a retroactive date: warriorsfund.org/find-cvso.