If you don’t have equity in your home, you probably think you can’t refinance it for many years. Luckily, if you have a VA loan, you can. You don’t need a specific LTV either – it can be 100% or even higher and you can still refinance.
It’s called the VA IRRRL program. It stands for the Interest Rate Reduction Refinance Loan. The name makes it sound like you have to reduce your interest rate. You do, but there are exceptions to the rule. Either way, you don’t need a specific amount of equity.
How the VA IRRRL Works
The IRRRL helps you refinance with little to no verification. Gone are the days of supplying paystubs, tax returns, and bank statements. The program doesn’t require verification of any of those details. It doesn’t even require you to verify your credit score or the value of your home.
What the VA does require, however, is timely mortgage payments. This is how they qualify you for the loan. If you’ve held the loan for more than 12 months, you can have one late payment. That payment can’t be more than 30 days late. It also can’t have occurred within the last 3 months.
If you’ve had the loan for less than 12 months, you can’t have any late payments. The VA looks at it this way. If you made your higher mortgage payments on time and now you refinance into a lower payment, you’re bound to make those too.
The Exceptions to the Rule
We talked about exceptions. Not every borrower lowers their payment when they use this program. Borrowers who have an ARM are one exception. They want to refinance before the loan adjusts. Their interest rate will likely increase as will their payment. But, the loan program they refinance into is less risky than an adjusting ARM. The VA allows this refinance without verification of anything further.
Borrowers who refinance into a shorter term are another exception. Let’s say you originally had a 30-year mortgage term. Now you want to refinance into a 20-year term. Your interest rate will decrease, but, your payment will likely increase. As long as it doesn’t increase more than 20%, you will be eligible for the program.
No Appraisal Necessary to Verify Equity
Perhaps the best part of the VA IRRRL is the lack of need for an appraisal. This is great news for any borrower that doesn’t have any equity! It’s even better news for those that are underwater. Yes, you can owe more than your home is worth and secure a VA loan.
Again, it all goes back to your payment history. If you make your payments on time, you put up a fighting chance to keep your property. The VA doesn’t want to have to pay out on your home. If you stopped making payments, the VA would have to pay the lender. The lender would then have to sell your home. It’s a mess the VA doesn’t want.
They figure by lowering your payment, you could afford your mortgage easier and will likely keep making payments.
Will Lenders Check Credit?
Some people worry about their credit and that it will exclude them from the VA program. According to the VA, lenders don’t have to pull your credit. This doesn’t mean every lender won’t, though. Some lenders feel better looking at your credit score. It’s a sign of your financial responsibility. If you don’t have a credit score higher than 620, you may have to find a lender that doesn’t pull credit.
What Other Requirements do Lenders Have?
The VA’s requirements are simple. As long as you have the right mortgage payment history and there is a benefit, you may qualify.
Lenders, on the other hand, may have some other requirements. They call them lender overlays. The lender funds the loan, so they have the most at stake. Because of this, some lenders require:
- Proof of your credit history
- Proof of your employment
- Proof of your income
- A drive-by appraisal or automated value of your home
Again, no two lenders will have the same requirements. The VA’s basic requirements, you’ll find everywhere. Other than that, you’ll find that every lender requires something different. Before you apply, ask lenders how they treat the VA IRRRL program.
Specifically ask if they require any type of home valuation. This will help you choose the lender worth your time. If you know you are underwater, it’s not worth wasting your time on a lender that will value your property.
Of course, you’ll want to shop around for the lender with the best interest rate too. The VA loan usually offers attractive interest rates, but each lender is different. If you want to maximize your savings, it pays to shop around.