You might think if you have credit issues that refinancing your VA loan is out of the question. Luckily, it’s not. There is one simple way you can refinance and get a lower rate or change your term no matter what happened to your credit.
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It’s called the VA IRRRL program. The Interest Rate Reduction Refinance Loan helps you take advantage of lower rates or lower terms. Even better though, you don’t have to verify your credit, income, assets, or your home’s value with this program.
How Credit Issues Aren’t a Problem
According to the VA, you do not have to prove your credit score in order to refinance an existing VA loan with the IRRRL program.
What this means is you may find a VA approved lender that doesn’t pull your credit. They are able to use your original credit score when you first applied for the VA loan. This doesn’t mean that every lender won’t pull your credit though. You may have to shop around and find a lender that doesn’t pull credit if your issues are bad enough.
What You Need for the VA IRRRL Program
Basically, in order to qualify for the VA IRRRL loan you need the following:
- An existing VA loan that you are current on
- Proof of a timely mortgage payment history (no more than one 30-day late in the last 12 months)
- A net tangible benefit for the refinance
What the VA really focuses on is the net tangible benefit for the refinance. They focus on this because it costs money to refinance. Plus, you could be starting your term all over again. The lender needs to see that there is a benefit to do this. The most common benefits are:
- Lower payment due to a lower interest rate
- Refinance from an ARM to a fixed rate
- Refinance from a longer term into a shorter term
In other words, you either need to save money on a monthly basis or in the long-term with a shorter term or more stable interest rate (fixed vs adjustable).
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The net tangible benefit combined with your good housing payment history is what the VA relies on for your approval. They know that things change and you may have a lower credit score than you did when you took out the original VA loan. They are okay with that as long as you paid a majority of your mortgage payments on time. Because there needs to be some type of benefit, the chances are that your payment will be lower. This usually means easier to afford.
The only exception to this rule is if your payment increases due to a refinance from an ARM to a fixed rate, for example. The fixed rate is usually higher. This could mean a higher payment. As long as it doesn’t increase more than 20%, you can still get away with very little verification for this loan.
When Credit Issues are a Problem
On the other hand, if you wanted to tap into your home’s equity and take out a VA cash-out loan, you could be in trouble with your credit issues.
The VA is still lenient when it comes to credit scores. However, lenders might be stricter if you increase your loan amount. Tapping into your home’s equity is a risk for the lender. They may want to see a higher credit score than the VA’s standard 620 requirement.
If you know you have issues with your credit, it’s best if you fix the issues before you try to apply for a cash-out VA refinance.
Watch Out for Lender Overlays
Even if you decide to go with the VA IRRRL rather than a cash-out refinance, you’ll have to watch out for lender overlays. Lenders are required to abide by the VA rules. However, they can add their own rules too. This means they can make the requirements stricter – they can’t ever loosen them, though.
You may find a lender that requires that they pull your credit or even that they verify your income. You aren’t restricted to one lender, though. You are free to shop around and ask different lenders their requirements for the program.
If you have credit issues, don’t worry that you won’t be able to refinance your VA loan. If rates drop or you have another reason for suddenly refinancing, the VA IRRRL program is a great option. Just know that you may have to shop around and you’ll have to pay a funding fee of 0.5% when you do choose a lender and close on the loan.
