The VA Streamline program is known for its easy to qualify for guidelines. According to the VA, all that you need to qualify are the following:
- A VA loan that is current on its payments and does not have more than 1 late payment in the last 12 months
- An interest rate that is lower than your current rate (unless you are refinancing from an adjustable rate loan to a fixed rate loan)
- A lower principal and interest payment than your current payment (unless you are refinancing from an adjustable rate loan to a fixed rate loan)
- Signed certification from the veteran acknowledging the effect that refinancing has on his loan
This is all that the VA requires. Notice, you do not see anything about credit scores, employment, or income. That is because the VA does not require this – they simply require that the housing payments are current. They do this because the purpose of the streamline program is to make the loan more affordable for borrowers, by lowering the rate, there is no reason to verify all of the qualifying documents once again. Some lenders think otherwise, though.
What do VA Streamline Program Lenders Do?
You will not find two lenders that will offer the same requirements when it comes to the VA Streamline Program. On one end of the spectrum, you may find a few lenders that go along with the VA’s guidelines and do not require you to provide any other documentation other than what is stated above. On the complete opposite end of the spectrum, however, you will find lenders that want to verify everything on the VA refinance, just as they would any other loan. There are also those that are in between. If your circumstances have changed drastically and you want to be able to refinance yet think it might be difficult to qualify, you might have to shop around with various lenders.
The Reason for the Verifications
It seems strange that lenders would require more than the VA requires, but the logic is there. Lenders are the entities that are giving the money to the borrowers, not the VA. For example, if you take out a $150,000 VA loan, the VA is not giving you the money, the lender that provides the loan gives you the money. The VA simply guarantees a portion of the loan. This means if you defaulted on that $150,000, the VA would give the bank a portion of that money to make their loss less extreme. That being said, the lender has a lot at stake here. The VA gets its funds from the funding fee that every borrower with a VA loan pays, so they get paid with every loan. The bank only makes money when you make your mortgage payments; if you do not pay, they do not make money.
What do Mortgage Lending Banks Verify?
There is no cut and dry answer as to what banks will verify. There are a few clues as to what they look for and why they ask for certain things from some borrowers and not others including:
- An area that is known for its declining values in the area will more than likely need an appraisal for most lenders just because the values are knowingly down and lenders need to protect themselves from handing out underwater mortgages.
- If a lender feels that your employment history is sketchy after talking to you, they may want to verify your employment and/or income to ensure that you are not out of a job or have been job hopping and that is why you cannot afford your mortgage payment and want to lower it.
- If your credit score dropped dramatically from what it was with the original VA loan, the lender needs to look into what happened. This can happen with any lender as most banks will not give a VA loan without at least looking at the credit score. Generally, the VA does not require a minimum score, but most lenders will not go lower than 600.
The largest reason that lenders impart their own overlays is to cover their own investment. They do not want to give a loan that they know will be defaulted on in the near future. Even if the payment is lower, if you are out of a job or the value of your home drastically decreased, there is nothing holding you back from not paying the mortgage. If you use the VA Streamline program to put off your mortgage payment for a month or two and delay the inevitable, a bank needs to be able to know that.
Do not be afraid to shop around with various lenders when you are ready to refinance your VA loan. Just because one lender verifies your income, employment, or appraised value does not mean another will too. If there is anything questionable in your loan file, shop until you find a lender that sticks closer to the VA guidelines rather than their own.