The VA has offered the streamline refinance program for many years. However, in the face of the changes the mortgage industry made, it went through some minor changes. Most of the changes you as the borrower will not see, but they are worth understanding in order to stay informed.
The main difference in the mortgage industry is the need for the mortgage to be a ‘ Qualified Mortgage.’ This means they provide a safety net for lenders against future litigation. It prevents borrowers from accusing lenders of giving them a loan that they cannot afford if they default in the future. Basically, it means that the lender took all precautions necessary to make sure you could afford the loan.
The VA has special rules regarding what qualifies it as a Qualified Mortgage. Keep reading to learn about them.
The VA Qualified Mortgage Rules
First, the rules only apply to veterans with a current VA loan. If you don’t have a VA loan, you cannot use the IRRRL program. You’d have to refinance into a standard VA loan with full verification. If you do have a VA loan, now though, you may qualify if:
- You already qualified for the standard VA loan
- You have a timely payment history on your current VA loan (no 30 day late payments)
- You obtained your original VA loan at least 6 months ago
- You have made at least 6 monthly payments on your current VA loan
- You will recoup the cost of the VA refinance within 36 months
The last point is the most important. If you don’t save enough on your loan to make up the closing costs within 3 years, the loan is not a Qualified Mortgage.
Here’s how you figure out where you stand.
- Get your total closing costs including the funding fee
- Figure out the total monthly savings for the new loan
Total closing costs/monthly savings = Months to recoup the closing costs
Here’s an example:
- Total closing costs $4,000
- Monthly savings on the new loan $150
$4,000/$150 = 26.67 or 27 months
This would qualify as a Qualified Mortgage because after 27 months, you would realize the savings of the loan.
What happens if your recoupment period is above 36 months? It’s no longer a Qualified Mortgage and you will likely have to fully qualify for the loan. The same premise applies if your new payment is 20% higher than the original payment. This usually occurs when you refinance from an ARM to a fixed rate or when you lower the term of the loan.
Fully Qualified VA Loans
So what happens if you have to fully qualify for the VA loan? Rather than relying on your payment history and net tangible benefit, the lender will verify the following:
- Credit score verification
- Income verification
- Debt ratio verification
In other words, the lender will need to qualify you for the loan much like they did for your home purchase. You’ll need a credit score that exceeds the lender’s requirements, as the VA doesn’t set a minimum score. You’ll also need to prove you can afford the new loan without your debt ratio exceeding 43% on the back-end.
In most cases, you still won’t need an appraisal, since technically it’s the streamline program. However, this requirement varies by lender. If the lender has a reason to order the appraisal, such as an increasing payment, they may do so just to protect themselves since they don’t have the protection of the QM rules.
The VA streamline program is a great way to refinance without having to do too much work. It’s often a cheaper alternative as well. If you don’t meet the Qualified Mortgage guidelines, though, be prepared to go through a bit more qualifying in order to get the loan.