VA Streamline Rules: What Happens When There’s a Change in Borrowers

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Existing VA borrowers are eligible to refinance under the Interest Rate Reduction Refinance Loan. But life happens, borrowers can part ways due to divorce or death, primarily. In cases where the original veteran borrower dies, can his/her spouse obtain an IRRRL? Is it possible for one veteran borrower to add a new spouse on his VA loan that he jointly took out with his former wife? These questions and more can be answered below.

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VA Rules on Changes in Borrowers

The Veterans Affairs (VA) requires that the parties obligated on the new loan – the IRRRL – should be the same as on the underlying VA loan. It also requires the original veteran borrower to retain ownership of the property subject to the new loan.

It does have guidelines for lenders to follow in case of the removal from or addition of borrowers to the new loan. Lenders are required to report to the VA any IRRRL loans where such change occurs unless it’s clear that the proposed loan is acceptable/possible under the IRRRL program.

This table summarizes the possibility of an IRRRL with changes to its obligor or co-obligor per the VA:

Original Loan Borrowers New Loan Borrowers Possibility of IRRRL
Unmarried veteran Veteran and new spouse Yes
Veteran and spouse Divorced veteran Yes
Veteran and spouse Veteran and different spouse Yes
Veteran alone Different veteran who has substituted entitlement Yes
Veteran and spouse Spouse alone as veteran died Yes
Veteran and nonveteran joint loan obligors Veteran alone Yes
Veteran and spouse Divorced spouse alone No
Unmarried veteran Spouse alone as veteran died No
Veteran and spouse Different spouse alone as veteran died No
Veteran and nonveteran joint obligators Nonveteran alone No

If you notice, the last three cases involving a divorced or a new spouse or a nonveteran alone are not eligible for an IRRRL because they did not involve the veteran or his/her spouse who originally borrowed the loan.

A change in obligors on IRRRLs does not necessitate re-underwriting or further credit/income documentation. Still, the lenders can look into the mortgage payment history in lieu of a credit check, require a statement regarding the new spouse or change in dependents, and seek a statement setting forth the obligor’s ability to repay the IRRRL without the co-obligor’s income.

The lender has to prove that the lower rate and payment brought by the new loan and the VA’s minimum guaranty of 25% will make up for the lack of re-underwriting the loan with changes to its borrowers.

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