COVID-19 mortgage help for vets: The VA IRRRL

Coronavirus has left many homeowners dealing with reduced income or even unemployment.

This has drastically affected Americans’ ability to make their mortgage payments. And those with VA mortgages are no exception.

VA homeowners affected by COVID-19 have options. The two big ones are mortgage forbearance or mortgage refinance.

Forbearance allows some homeowners to stop making mortgage payments for up to a year. On the surface, that makes it sound like a great option.

But forbearance also has inherent drawbacks. Although forbearance won’t affect your credit score, per CARES Act rules, it will still show up on your credit report. That means it could affect your loan eligibility in the future.

Missed payments during forbearance will also need to be repaid at some point. That might mean bigger payments after forbearance ends, or a large payment due when you sell the home.

For homeowners hoping to avoid forbearance, a good solution may be the VA streamline refinance.

Fortunately for VA mortgage holders, forbearance isn’t the only option.

Many VA homeowners are opting to take advantage of one of the best refinance loans available — the VA Interest Rate Reduction Refinance Loan (IRRRL).

Some benefits of the VA IRRRL include:

• No appraisal required
• No income verification required
• No employment verification required (typically)
• Closing costs can be rolled into the loan
• VA funding fee is reduced to 0.5% of loan amount

VA rates are typically the lowest of any loan program. And current VA mortgage rates are no exception. They are as low as they’ve ever been in history.

Here’s an example of the savings for a VA IRRRL refinance:

Let’s say your loan amount is $250,000, and your interest rate is 4.5%.

If you refinance your current VA loan down to a rate of 2.75% with a VA IRRRL, your principal and interest payments would drop from $1,262 to $1,108.

That’s a savings of $243 per month. In total, you could save more than $14,500 in just five years.

If you’ve lost your job or you’re on reduced income, you may still be able to qualify for a VA streamline refinance.

Even if you’ve lost your job or you’re on reduced income due to COVID-19, you may still be able to qualify for a VA streamline refinance. Many lenders do not require employment verification.

Some lenders do verify employment, though, so you’ll need to check with your lender before refinancing.

If your lender is strict about employment verification, you’re free to shop around and refinance with one that’s more lenient.

Mortgage forbearance for veterans

Of course, refinancing won’t be an option for everyone. Although the VA IRRRL can reduce monthly payments significantly, some who’ve lost their jobs need to see bigger savings than a refinance can offer.

That’s where mortgage forbearance comes in.

Forbearance allows qualifying homeowners to suspend mortgage payments for up to one year.

The important thing to note is these payments are not forgiven. Interest still accrues, and the skipped amount needs to be paid after the forbearance period ends.

Under the CARES Act, VA mortgage holders are permitted to ask for an initial 180-day loan forbearance period (180 days = six months). This is permitted regardless of the borrower’s delinquency status.

VA loan rules for COVID-19 mortgage relief states that when the borrower makes this request, the servicer must grant it, with no additional documentation.

VA rules state that when a homeowner requests forbearance, the lender must grant it, with no additional documentation required.

VA guidelines for this mortgage relief do not stop there.

The loan forbearance may be extended by an additional six months at the borrower’s request.

The VA mortgage borrower is required to reach out to the lender for the first six months, and then is required to ask again for an additional six months.

At no time will the forbearance or the extension of a forbearance be automatic. You should not expect an automatic bailout or relief of any kind where your legally binding mortgage loan contract is concerned.

How VA mortgage forbearance works

VA mortgage borrowers have quite a bit of say over the initial terms of the forbearance.

According to the VA official site, “The borrower, not the servicer, is entitled to determine the period of the forbearance, subject to the statutory limit of up to 360 days.”

The VA has also warned lenders, “During a period of forbearance described above, servicers shall not charge fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract.”

But borrowers should keep careful track of the fees charged to them during the mortgage relief period, and make sure they are not being penalized during the loan forbearance.

VA loan holders also have options when it comes to making up the missed payments from the forbearance period. Borrowers may:

• Choose a larger monthly mortgage payment after forbearance, until the missed amount is repaid
• Work with their lender to figure out a loan modification plan
• Defer repayment of the missed amount until the loan is refinanced, the house is sold, or the mortgage term ends

When you contact the loan servicer to request mortgage relief, the Department of Veterans Affairs expects the lender to fill you in on the details. “VA expects the servicer to inform the borrower of the borrower’s forbearance rights,” it says.

But you should still understand your options ahead of time, so you can talk with your loan servicer about which repayment plan is best for you.

On one thing, VA rules are clear. Your loan servicer cannot require you — as a borrower seeking mortgage relief for coronavirus reasons — “to make a lump sum payment, equating to what would have been due if a forbearance was not in effect, after the forbearance period ends.”

In other words, you lender cannot make you repay everything at once after forbearance is over.

However, you may choose to do so if you wish. Current VA COVID-19 guidance states, “…a lump sum is acceptable if it is to be paid back at the end of the loan or if a borrower opts to make a lump sum payment” instead of pursuing other options.

Which mortgage relief option is right for you?

Fortunately for homeowners with VA mortgages, there are steps you can take to avoid becoming at risk of default or foreclosure.

A VA Interest Rate Reduction Refinance Loan is a great option for homeowners seeking to loosen up their budget.

The long term savings gained from lowering your rate into the 2’s could end up in the tens of thousands of dollars.

Regardless of the reduced payment and long-term savings, if you have no income and little if any savings, forbearance may be a better option for you.

Do your research and speak a mortgage lender about which option may be best for your circumstances.