Qualifying for a mortgage always depends on your credit score, right? Usually, yes. However, there is one major exception. The VA IRRRL program doesn’t look at your credit score. At least that’s what the VA tells VA approved lenders. Some lenders do pull credit for their own peace of mind. It’s not necessary, though.
Here we discuss the VA’s rules. We also look at how you can refinance without worrying about your credit.
The VA Rules for a VA IRRRL
The VA only worries about 1 thing with a VA IRRRL – your mortgage payment history. They assume if you can afford your current payment that you can afford a smaller one. That’s the point of the VA IRRRL program. It’s called the Interest Rate Reduction Refinance Program. You can apply if you qualify for a lower interest rate. Usually this comes down to timing. If rates drop enough that you save money, you can refinance.
A timely mortgage payment history is crucial, though. 1 late payment in the last 12 months is all they allow. That late payment can only be 30-days late, too. Anything longer than that or more than 1 late payment renders you ineligible.
Aside from the mortgage payment history, the VA requires a few simple things:
- Benefit for the loan – A lower payment is a benefit. If you have an adjustable rate mortgage now, though, refinancing into a fixed rate is a benefit too.
- Proof you occupied the property – Your original VA loan required owner occupancy. You must prove you lived there. But, you don’t have to live there moving forward even with the IRRRL.
- You only refinance what you owe – You can’t take cash out of the equity of your home. You refinance the outstanding principal, interest, and the new funding fee only.
Can a Lender Require Your Credit Score?
The lender has final say in the requirements. They must follow the VA’s minimum requirements. But, they can add their own too. Why would a lender want to do this? Lenders fund the loans themselves. The VA just guarantees the loan. This means they back the lender up in the face of default. Lenders don’t want to risk default, though. This is why they may pull your credit.
The VA doesn’t have a minimum credit score for the program. Lenders might, though. Talk to different lenders to see what they offer. If you know you had a recent credit issue, be honest with lenders. Let them know what you did. They should be able to tell you right off the bat if it would disqualify you from the IRRRL program.
If a lender does require your credit report and you know it will ruin your chances, shop around. Not every lender has overlays. Some stick to the VA’s requirements. Knowing they have the guarantee of the VA’s funding, they can afford to take some risks with financing.
Disposable Income Helps Matters
The VA loan program has one of the lowest levels of default. The VA credits the success to their focus on disposable income. When you originated your VA loan, the lender verified your disposable income. You have this money left after paying your monthly bills. This only includes bills reporting on your credit report. Car loans, credit cards, and student loans are a few examples. The lender totals up these minimum payments along with your mortgage payment. They then subtract this amount from your gross monthly income. This number should meet the disposable income requirements for your area and family size.
As an example, let’s look at a family of 3 throughout different areas of the United States:
- Northeast $909
- Midwest $889
- South $889
- West $990
The differences aren’t incredible, but they exist. The cost of living is higher in the West, which is why the requirements increase in that region. With each additional family member, you need more disposable income.
The VA assumes if you meet the disposable income requirements, you can comfortably afford your bills and daily life. Borrowers that don’t meet the requirements may default on their loan. If they must sacrifice daily living expenses, they may regret their home purchase. This focus helps the VA stay afloat. It’s also the reason they don’t focus on your credit score during the original VA loan or the VA IRRRL.
What if Your Credit Score Affects Your VA IRRRL?
It can happen. A lender may turn you down for a low credit score. If that’s the case and you don’t find another lender, you can fix your credit. Here are some simple tips you can use:
- Bring all accounts current – Even 1 late payment can negatively affect your credit score. Make sure you pay all accounts current. Then continue making your payments on time. The more consistently you pay your bills on time, the higher your credit score increases.
- Don’t apply for new credit – The older your accounts, the better your credit score. Avoid taking out new credit until you close on your mortgage. This gives your accounts a chance to age.
- Don’t overextend your credit – Aim for a 20% utilization rate. This means you have no more than 20% of your available credit outstanding at once. This shows financially responsibility. This factor is a large part of your credit score, so focusing here can really help.
- Fix any errors – Pull your credit report at least once a year. This helps you determine if there are errors on your report. If there are, contact the credit bureau about them. You’ll need ample proof of the mistake. You should also contact the creditor reporting the incorrect information. It may take a month or so, but your credit score will increase if you get the information corrected.
Should You Use Your Current Lender?
There are benefits of using your current lender for the VA IRRRL. They probably won’t pull your credit. They know your history of making mortgage payments. If it’s flawless, they don’t have much of a reason to pull your credit. What if you want to see what else is out there, though? You should shop around. This helps you see what other lenders offer. You may find lower rates elsewhere. You may also find lower fees.
A new lender may pull your credit, though. Just prepare yourself for that. If you pulled your credit ahead of time, though, you should know what to expect. You won’t know your credit score, but you’ll see the history. If there’s nothing negative reporting in the last 12 months, you shouldn’t have a problem. If a lender turns you down for your credit score, they must tell you why. This gives you the chance to fix it and try again.
Ultimately, your credit score doesn’t affect your VA IRRRL. With some lenders, it might though. Consider all of your options. Any VA approved lender can refinance your VA loan. Your goal should be to save as much money as possible. If your credit negatively affects your mortgage file, you’ll get a higher interest rate. There may not be as much benefit to refinance then. Look for the best deal between several lenders. This helps you save yourself the most money on this flexible refinance program.