You have a VA loan and want to lower your interest rate. The problem is that you have bad credit. Are you stuck with your current rate? You might not be – there’s a secret way you can get around it. We let you in on the secret below.
How VA Refinancing Works
Once you have a VA loan, the VA makes it very easy to refinance. It’s called the VA IRRRL or the Interest Rate Reduction Refinance Loan.
This loan allows current VA loan customers to refinance with very little verification. This includes no credit check! The lender wouldn’t even know if you have bad credit. In order to qualify, though, you’ll need on time mortgage payments. This is what the VA requires lenders to base the approval on. As long as you have 12 months of on time mortgage payments, you may qualify for the loan.
The lender does not have to look at your credit score or the payment history of any other accounts. They don’t have even to verify your income or assets. It’s all based on your current mortgage payment history.
You Need a Net Tangible Benefit
There is one thing you must prove, though. You must show that the loan has a net tangible benefit. In other words, that you save money. Generally, this is possible when you refinance from a higher rate to a lower rate. This is why most people refinance in the first place.
But, there are a few exceptions to the rule. They include:
- Refinancing from an ARM to a fixed rate loan – The adjustable rate loan is riskier for lenders. If you refinance into a fixed rate, the risk decreases. This is seen as a net tangible benefit in the eyes of a lender.
- Reducing your term – Again, reducing your term reduces the risk you pose to the lender. The longer you borrow money, the riskier it is for the lender. Lowering the term means a higher payment in most cases, but it’s still a net tangible benefit.
The rule that applies to both above scenarios, however, is that the payment can’t increase more than 20%. If it does, you will have to verify your income in order to qualify. If the payment increases less than 20%, though, you can proceed like a normal VA IRRRL.
What if the Lender Sees Your Bad Credit?
In some cases, a lender may pull your credit. Some pull it to verify your mortgage payments. Others do so just to see what other things report on your credit report. They look for things like major collections or seriously delinquent accounts.
If you come across a lender that pulls your credit and denies your loan because of bad credit, shop around. The VA does not require VA lenders to pull your credit. You have the option to shop with other lenders. You can get quotes from as many lenders as you wish. Of course, at some point you’ll have to make a decision, though.
If you have bad credit, consider coming clean with the lender. Let him know up front what you are dealing with. If you have a solid mortgage payment history, the lender may overlook it. If not, like we said, shop around.
Work on Your Credit Early
Even though the VA doesn’t require lenders to pull your credit, it’s not a bad idea to work on it early. There are ways you can boost your score up with just a few simple changes:
- Pay your bills on time
- Lower your outstanding balances
- Don’t close old accounts even if they have a zero balance
- Don’t open new accounts
- Take care of any outstanding collections
Even if you have a bad credit score, the lender can look at your history and see that it improved. The VA loan has the advantage of having the VA guarantee. Lenders are more willing to lend to borrowers with less than perfect credit because they know they will get paid back if you default.
This doesn’t mean you can go out and go crazy with your credit. You should still try to keep your score as high as possible. But, in the event that you have bad credit, there is likely a lender out there willing to do the VA IRRRL.
The largest benefit of the VA IRRRL is the lower payment. Keep in mind, you’ll still pay closing costs and the funding fee. The VA charges just 0.5% for the IRRRL program, though. This saves you even more money in the long run.
Consider looking into the VA IRRRL if you need to refinance. Even if you have bad credit, the chances of approval are high if you have a stable mortgage payment history.