Refinancing a VA Loan with Questionable Credit

VA loans are a bit more forgiving overall compared with other zero/low down payment programs, and refinancing a VA loan is a great option. For those who qualify for a VA loan and want to come to the closing table with close to zero cash, the VA loan can’t be beat. No down payment, restricted closing costs and somewhat relaxed credit requirements make for a powerful loan program. Interest rates for VA loans are also extremely competitive and because there’s no additional monthly mortgage insurance payment needed, buying power is increased. Other low/no down payment loans ask for a monthly mortgage insurance payment which increases the monthly payment. If you’re thinking about refinancing a VA loan, don’t let a low credit score hold you back.

Refinancing a VA Loan Explained

While the VA doesn’t specifically address a minimum credit score in order to qualify, a minimum score of 620 is often referred to. But that’s not always the case. Lenders can make exceptions to most guidelines as long as they can provide a valid reason why the lender decided to approve a loan that might be a “just miss” with other programs.  When someone does have a VA loan and they are interested in refinancing,  credit doesn’t have as much of an impact on the approval decision compared to approving the initial loan to fund your purchase.

Now let’s say that maybe you have an adjustable-rate VA loan or your current rate is higher than what’s currently available but over the past couple of years you’ve had some credit “bumps” that have dropped your credit score. What do you do? With a VA loan, you’ve got some help. It’s called the Interest Rate Reduction Refinance Loan, or IRRRL. Lenders however refer to this program as a VA “streamline” because it’s so easy to qualify for.

With the streamline, there is no minimum credit score needed. In fact, very little is documented. You don’t need to provide proof of employment or provide paycheck stubs or income tax returns. All you need to do in order to qualify is to have your lender verify a “net tangible benefit.” This means that refinancing provides a financial benefit in doing so. Switching from an ARM to a fixed is considered a net tangible benefit. So too is reducing the term of your loan which saves on long term interest. It doesn’t always have to be about a lower interest rate.

Takeaway

Credit? While there is no minimum score for a VA streamline your lender will need to verify there are no payments made more than 30 days past the due date within the last twelve months and no such lates within the past six. If your credit profile shows that, then your credit score means much less. The VA figures that credit problems can occur but as long as you’ve paid attention to your mortgage, that means a lot more compared to a credit card.