Do You Know VA’s Qualified Mortgage Rules for Streamline Refinances

VA Streamline RefinancesThe VA loan program’s no-frills refinance option got a slight makeover last year in the wake of major mortgage industry changes. But most veteran homeowners won’t notice much difference in their pursuit of a VA Interest Rate Reduction Refinance Loan (IRRRL), better known as a VA Streamline.

Nearly all VA loans are considered “safe harbor” Qualified Mortgages, part of a new class of mortgages created in the wake of the housing market collapse. That “safe harbor” designation provides legal protections to lenders in case they’re later accused of putting borrowers into bad loans.

But the VA’s rules on what makes a Qualified Mortgage (QM) carved out some distinctions when it comes to the Streamline, a refinance option only available to current VA homeowners. The gist is that every VA Streamline is considered a Qualified Mortgage, but not all VA Streamlines are eligible to receive the “safe harbor” designation that better insulates lenders.

Let’s take a closer look.

Streamline Refinances & Safe Harbors

In order for VA Streamline refinances to gain that “safe harbor” protection, lenders need to document the following:

  • The loan meets all necessary VA guidelines
  • The purchase loan being refinanced was originated at least six months prior to the new loan’s closing date
  • The borrower has made at least six mortgage payments and hasn’t been more than 30 days late
  • Borrowers financing cost and fees associated with the refinance (not to include prepaid expenses like property taxes and homeowners insurance) must recoup them within 36 months of the new loan closing

VA put the recoupment period requirement in place to help highlight the difference in out-of-pocket or financed expenses between the original purchase loan and the new refinance. Taxes, insurance, HOA fees and other costs that homeowners would have paid regardless aren’t counted in that recoupment calculation.

VA Streamlines that fail to meet these guidelines can still be what’s known as “rebuttable presumption” qualified mortgages, which offer lenders less protection than the safe harbor designation.

Lenders may require full credit underwriting on a VA Streamline in cases where the recoupment period exceeds 36 months. Borrowers may also need to meet a credit score benchmark if they’re currently unemployed or if the refinance increases their monthly mortgage payment by more than 20 percent. Policies and requirements can vary by lender.

Otherwise, these low-impact refinance loans don’t generally require credit and income underwriting. That’s a big benefit for VA homeowners.

Streamline Income Verification

The VA exempts most Streamline refinances from income verification guidelines because it believes homeowners have already been down this road.

Assessing credit, income and a borrower’s ability to repay the loan are all key considerations for a VA purchase loan. Refinancing one is “simply improving a borrower’s ability to repay a loan that the (VA) Secretary has already guaranteed under more stringent underwriting guidelines,” the VA noted in its Qualified Mortgage rule.

The department estimates that adding income verification steps could add an extra two to four weeks to the Streamline process.

“VA believes it is unfair to negate the income verification exemption when it seems only to help the overwhelming majority of veterans who obtain an IRRRL,” the VA’s rule reads in part. “If the veteran could afford the original loan, then the idea is that the IRRRL should be even more affordable.”


About the author: Chris Birk is an award-winning former journalist and Director of Education for Veterans United Home Loans. His analysis and articles have appeared at The New York Times, the Wall Street Journal, USA Today, ABC News, CBS News, Fox Business, Military.com and more.

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