VA IRRRL GUIDELINES. Table of Contents

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LTV MATRIX

PRIMARY RESIDENCE ONLY

INTEREST RATE REDUCTION REFINANCE LOANS (IRRRL)

LTV CLTV/HCLTV FICO LOAN AMOUNT UNDERWRITING

100%¹ 100% 640 Up to $700,000 Manual

100%¹ 100% 700 $700,001 to $1.5M^2,3,4 Manual

1Properties located in Nevada are reduced to 95% maximum LTV

2Loan Amounts > $700,000 require an exception

3Loan Amounts > $700,000 require the Underwriter to complete Registration form 19 located on Sharepoint

4Loan Amounts > $1,000,000 require appraisal to be performed by “Certified Appraiser”

PROGRAM SUMMARY

An Interest Rate Reduction Refinance Loan (IRRRL) is a VA-guaranteed loan made to refinance an existing VA- guaranteed loan, generally at a lower interest rate than the existing VA loan, with lower principal and interest payments than the existing VA loan, and has a more streamlined underwriting process with reduced documentation.

LOAN AMOUNTS

Always use VA Form 26-8923, IRRRL Worksheet, to calculate the maximum loan amount. The maximum loan amount is the existing VA loan balances plus the following:

• including any late charges (as long as the borrower has not been 30 days late in the past 12 months), plus

• allowable fees and charges (includes up to two discount points), plus

• the cost of any energy efficiency improvements, and

• the VA funding fee.

***Note: There is no maximum dollar amount for VA loans. Since an IRRRL rolls the above items into the new loan, and VA guarantees at least 25 percent of the loan amount (without regard to the veteran’s entitlement), the new loan amount may be more than the limits established by the secondary market. It is the Underwriter’s responsibility to ensure it has a marketable loan.

***Note: Loan Amounts over $700,000 require an Exception

LOAN PROGRAM CODES

• VA15SR

• VA20SR

• VA25SR

• VA30SR

• VA5/1SR

LOAN TERMS

The maximum loan term is the original term of the VA loan being refinanced plus 10 years, but not to exceed 30 years and 32 days. For example, if the old loan was made with a 15-year term, the term of the new loan cannot exceed 25 years.

ADJUSTMENT RATE DETAILS

CAPS MARGIN INDEX FLOOR

1/1/5 2.00% Constant Maturity Treasury Index Margin

ELIGIBLE PROPERTY TYPES

Refer to the VA Guidelines.

Condos do not require a condo approval.

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INELIGIBLE PROPERTY TYPES

Refer to the VA Guidelines.

INTERESTED PARTY CONTRIBUTIONS

N/A

MORTGAGE INSURANCE

N/A

MAX NUMBER OF FINANCED PROPERTIES

No limit.

QUALIFYING RATE

Qualify at the Note Rate

QUALIFYING RATIOS

Ratios are not calculated for the VA IRRRL program.

RESERVES

Not required.

SEASONING

A minimum of 6 month payment history on the current mortgage is required.

• If less than 6 months, loan must be documented and underwritten as a standard VA refinance transaction.

• If the loan is seasoned 12 months or more, evidence that the existing loan has not had any 30-day or greater mortgage lates in the past 12 months

SUBORDINATE FINANCING

The new IRRRL must replace the existing VA loan as the first lien on the same property. Any second-lien holder would have to agree to subordinate to the first lien holder.

An existing 2nd mortgage may be subordinated (new subordinate financing is not allowed).

UNDERWRITING

The principal and interest payment on the IRRRL MUST be less than the loan being refinanced unless one of the following exceptions applies:

• the IRRRL is refinancing an ARM OR

• the term of the IRRRL is shorter than the term of the loan being refinanced.

A significant increase in the veteran’s monthly payment may occur with any of these three exceptions, especially if combined with one or more of the following:

• financing of closing costs,

• financing of up to two discount points,

• financing of the funding fee, and/or

• higher interest rate when an ARM is being refinanced.

If the monthly payment (PITI) increases by 20 percent or more:

• the Underwriter must determine the veteran qualifies for the new payment from an underwriting standpoint; such as, determine whether the borrower can support the proposed shelter expense and other recurring monthly obligations in light of income established as stable and reliable.

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• The Underwriter must include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20% or more.

• document the veteran qualifies for the new monthly payment by the following:

o Pay stubs covering at least the most recent 30 day-period o 2 years W2s

o DTI > 41% up to 50% requires documented compensating factors

 Maximum 50% DTI when PITI will increase 20% or more 4506-T

Not required for VA IRRRL transactions.

Allowable Financed Closing Cost Fees

The following fees and charges may be included in an IRRRL:

• the VA funding fee, and

• any allowable fees and charges; such as, all allowable closing costs, including Bay Equity’s flat charge.

• only up to two discount points can be included in the loan amount o any amount over 2 points must be paid in cash

• any customary and reasonable credit report or appraisal expense incurred by a lender to satisfy its lending requirements may be charged to the borrower and included in the loan.

Amount of Guaranty and Entitlement

No additional charge is made to the veteran’s entitlement for an IRRRL; such as, the amount of the veteran’s previously used and available entitlement remains the same before and after obtaining the IRRRL.

The new IRRRL loan amount may be equal to, greater than, or less than, the original amount of the loan being refinanced.

This may impact the amount of guaranty on the new loan, but not the veteran’s use of entitlement.

Example of New Loan Amount More Than Old Loan

The existing VA loan was originally made for $110,000 with a guaranty of $27,500, or 25 percent. The new IRRRL is for

$112,000. The guaranty on the new loan is $28,000 or 25 percent, but the veteran’s entitlement use remains at $27,500.

Example of New Loan Amount Less Than Old Loan

The existing VA loan was originally made for $42,000 with a guaranty of $25,000, or almost 60 percent (the percentage applicable under former law). The new IRRRL is for $40,000. The guaranty on the new loan is $20,000 or 50 percent, but the veteran’s entitlement use remains at $25,000.

Amount How to calculate the amount of guaranty on an IRRRL

IRRRLs up to $45,000

First, calculate the lesser of:

• 50 percent of the IRRRL loan amount, or

• the amount of guaranty used on the VA loan being refinanced.

The amount of guaranty is the greater of:

• the above result, or

• 25 percent of the IRRRL loan amount.

IRRRLs of $45,001 to $56,250

• $22,500, or

IRRRLs of $56,251 to $144,000

• 40 percent of the IRRRL loan amount, or

IRRRLs greater than $144,000 Guaranty on these is always 25 percent of the IRRRL loan amount.

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Page 6 of 8 Appraisal

• All appraisal must be ordered through Bay Equity’s Appraisal portal (standard AIR compliance and process must be followed, appraisals must not be processed through TAS)

• 2055/1075 appraisal with a 1004MC is required.

• 2-4 unit transactions require a full appraisal

• Any repairs that impact safety, livability or habitability must be completed prior to funding.

• The total loan amount must be supported by the value of the property. The appraised value must be supported and be equal to or greater than the total loan amount.

Assets

Not required on IRRRL transactions.

AUS

Manual underwrite only. Not required to run DU or LP on IRRRL transactions.

Borrower Eligibility

The borrower must be the same except for the removal of a non-veteran spouse due to death or divorce (provide supporting documentation indicating event occurred at least 12 months before the time of application)

• There will be no exceptions granted to this requirement. --only new spouses can be added.

Parties Obligated on Old VA Loan Parties to be Obligated on new IRRRL Is IRRRL Possible?

Unmarried veteran Veteran and new spouse Yes

Veteran and spouse Divorced veteran alone Yes

Veteran and spouse Veteran and different spouse Yes

Veteran alone Different veteran who has substituted

entitlement Yes

Veteran and spouse Spouse alone (veteran died) Yes

Veteran and nonveteran joint loan obligors Veteran alone Yes

Veteran and spouse Divorced spouse alone No

Unmarried veteran Spouse alone (veteran died) No

Veteran and spouse Different spouse alone (veteran died) No

Veteran and nonveteran joint loan obligors Nonveteran alone No

Case Number Ordering

The case number must show that the loan is an IRRRL transaction. Case numbers having appraisals ordered through WebLGY will NOT be correct.

• Originator to obtain VA IRRRL case number through VA Portal

o WHOLESALE: Fully completed VA Case Number & COE Form must be completed and emailed to casenumber@bayeq.com. Refer to www.bayeq.com for form.

o RETAIL: Order the case number through the VA portal.

• If originator provides form 1805 and obtains case number via ordering VA appraisal, the loan file will be suspended.

• Case number must be cancelled and new IRRRL case number provided prior to underwriting.

Cash Back

Maximum cash back at closing is $500.

Certificate of Eligibility (COE)

• Originator to provide current Web Generated Certificate of Eligibility (confirm old loan number and Funding Fee Exempt)

• Underwriter to verify prior loan validation through VA Portal AND

• Verify the VA case number provided by the VA matches the VA case number of the existing loan before closing the IRRRL

Credit Report Requirements

• Mortgage Only Credit Report/Credit Score is required on all VA IRRRL transactions

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Page 7 of 8 o No serious delinquent obligations in the last 12 months

• Non-Traditional credit reports are not eligible Employment/Income Requirements

• Employment information must be completed on the 1003

• Income documentation is not required unless PITIA is increasing more than 20% or Borrower(s) receives retirement, pension, or SSI.

• VVOE must be completed on all loans.

o In lieu of VVOE for Borrower(s) receiving Pension, Retirement, or SSI the following must be obtained:

 Most current bank statement, OR

 Most current deposit statement, OR

 Most current benefit award letter, OR

 Most current W-2/1099 Fees

Funding Fee below

INTEREST RATE REDUCTION REFINANCE LOANS (IRRRLs)

All IRRRLs 0.50%

Funding Fee Exemption

A veteran must establish any claim for exemption from the fee. The following are the only exceptions allowed:

o Veterans receiving VA compensation for service-connected disabilities

o Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay or active service pay

o Surviving spouses of veterans who died in service or from service-connected disabilities (regardless of whether such surviving spouses are veterans with their own entitlements and whether they are using their own entitlements on the loan)

o Veterans who are rated by the VA as eligible to receive compensation as a result of pre-discharge disability examination and rating.

Ineligible Borrower Paid Fees

o Veteran may NOT pay for VA Non Allowable Fees

 Underwriting

 Processing

 Escrow/Sub-escrow

 Notary

 Courier Inspections

Termite inspections are not required on VA IRRRL transactions. However, one may be required at the Underwriter's discretion.

IRRRL Loan Amount Calculation

• New loan amount may include the following:

o Unpaid principal balance (including accrued interest and late fees, if applicable) o + Allowable closing costs LESS any credits from YSP (per lock)

o + Prepaid expenses

o - Less Any credits from YSP o + Funding fee

• New loan amount cannot include the following o Debt pay off

o Junior lien pay off

• 25% guaranty is considered satisfied LTV/CLTV Calculation:

• 100% LTV / Unlimited CLTV for existing subordinate financing including VA Funding Fee

• LTVs on IRRRLs are calculated using the TOTAL loan amount (Base Loan Amount + Funding Fee).

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• Credit score requirements determined by Total Loan Amount.

Mortgage History

0x30 within last 12 months for all properties Nevada Properties

If the subject property is located in the state of Nevada, the maximum LTV is reduced to 95%.

Occupancy

Owner-Occupied Only Recently Listed Property

The listing must have been expired or been withdrawn on or before the application date.

Transaction Eligibility

The loan being refinanced must be an existing VA Loan.

Verification of Employment

VVOE or 3^rd party verification must be provided.

Veteran’s Statement and Lender’s Certification

For all IRRRLs, the veteran must sign a statement acknowledging the effect of the refinancing loan on the veteran’s loan payments and interest rate.

The statement must show the interest rate and monthly payments for the new loan versus that for the old loan. The statement must also indicate how long it would take to recoup ALL closing costs (both those included in the loan and those paid outside of closing).

If the monthly payment (PITI) increases by 20 percent or more, the Underwriter must include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20 percent or more.

Example:

• Vet’s monthly payment decreases by $50.00

• Vet pays $5,000 in closing costs (includes all costs – closing costs, funding fee, discounts, etc.)

• Recoup closing costs in 100 months - $5,000 divided by $50

***Note: This would not be required in those limited cases where the payment is not decreasing (reduced term of loan, etc.).

The veteran’s statement may be combined with the lender’s certification and should be on the lender’s own letterhead.