If you know you have bad credit and paid some bills late (more than 30 days late), you might think your chances of refinancing are out of the question.
Normally, this would be the case. Lenders only want to give loans to borrowers that have good credit and pay their bills on time. If you are a VA borrower, though, you have the good fortune of having the VA Interest Rate Reduction Refinance Loan at your disposal.
With this refinance program, it is entirely possible to refinance even if you have bad credit and/or late payments.
What is the VA IRRRL?
The VA IRRRL is the VA’s version of a streamline refinance. When we say streamline, we mean that you need to provide minimal information and you can still refinance. The VA allows lenders to use your original qualifying information to obtain the loan.
What does this mean for you?
You may not have to prove your credit score, income, assets, or even the value of your home. You can refinance as long as you can prove that you paid your mortgage on time for the last 12 months and that you can prove that you benefit from the refinance. It’s that simple.
What if you Have Bad Credit?
Because the VA lets lenders use the original qualifying information for the VA loan, lenders aren’t required to pull your credit. This means your credit score could be much lower than when you originally took out the VA loan and you may still qualify.
Keep in mind, though, some lenders may still pull your credit, and they have the right to do so. Since it’s not the VA that funds the loans, but rather the lender that writes your loan, the lender has the final say in how they qualify you for the loan. In some cases, this may mean that the lender pulls your credit.
If you find a lender that requires a new credit score to qualify you for the loan, you can always shop around and find a different lender. Each lender has different overlays or rules. You can take your time and shop around until you find a lender that doesn’t pull your credit.
What if you Have Late Payments?
Again, because the lender doesn’t pull your credit, they probably won’t know about your late payments. There is one exception, though. The lender will need to see your mortgage payment history. If you didn’t pay your mortgage on time over the last 12 months, you won’t be eligible for the VA IRRRL. You have to have on-time mortgage payments during this time. Some lenders may allow a one-time exception, allowing you to have one late payment during that time, but this will vary by lender.
If you have any other late payments, the lender won’t know about them unless they pull your credit. If that’s the case, you may have to keep shopping around until you find a lender that won’t pull your credit.
Proving the Net Tangible Benefit
Aside from your on-time mortgage payments, you also need to prove that there is a benefit for you to refinance. The VA requires this in order to provide you with the refinance. There’s no sense in the VA putting their neck on the line if you don’t benefit from the refinance.
This is also a way for the VA to protect you from wasting money. Refinancing costs money, even if it’s a streamline refinance loan. It’s not worth paying those fees if you won’t benefit much from the refinance. The VA doesn’t have a minimum amount that you must save or any other requirements like that; it’s up to each lender to determine if the benefit is enough for you to make out on the refinance.
The bottom line is that you can refinance even if you have bad credit or late payments. It’s important to make sure that you benefit from the refinance, though. You are going to pay closing costs to the lender and to the VA for the refinance. Make sure that the refinance is worth it so that you can reap the savings and possibly get yourself back on track, raising your credit score and bringing your payments current.