Have Bad Credit? Here’s How You Can Refinance Your VA Loan

You might think that if you have bad credit, your chances of refinancing your VA loan are gone. If interest rates have dropped and you know you can get a lower interest rate, you may be kicking yourself for ruining your credit.

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We have good news for you, though. There is a way to refinance your VA loan even if you have bad credit. In fact, the lender may not even know that you have bad credit. The VA streamline refinance is an option for veterans to refinance their VA loans with little verification required.

Lenders Don’t Check Your Credit

If you opt for the VA IRRRL program, lenders don’t have to pull your credit. They can use your credentials from your original VA loan. This means even if your credit score decreased, you may still be able to refinance.

Now these are per the VA guidelines. Keep in mind that every lender has the right to add their own guidelines onto what the VA requires. This may mean that some lenders will pull your credit. Luckily enough, you can shop around for different lenders. As you do, inquire about their requirements. Do they pull credit? If so, what credit score do they require? Chances are you will come across several lenders that don’t pull credit because they rely on other data.

Timely Mortgage Payment

Rather than your credit score, the VA wants lenders to focus on your mortgage payment history. The VA streamline loan is strictly a rate/term refinance, so you can’t take out a larger loan and use the cash for something else. Because of this, you are bound to take out a lower loan amount than you originally took when you bought the home.

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If the lender looks back at your 12-month mortgage history and sees that you were able to make your mortgage payments on time, they will be pretty likely to approve your request to refinance without even looking at your credit.

If you have a late mortgage payment reporting, (meaning more than 30 days late) you may have to find a lender willing to make an exception for one late payment. If you have more than one late payment, you’ll have to wait until you have a full 12 months of timely mortgage payments.

Net Tangible Benefit

In addition to timely mortgage payments, the VA requires that you benefit from the refinance in some way. The most common way is with a lower payment. If you are able to lower your interest rate, you’ll have a lower payment, which may be easier to afford.

A lower interest rate isn’t the only way to prove a net tangible benefit though. You can also prove it with:

  • Refinancing from an ARM to a fixed rate loan
  • Lowering your loan’s term

Basically, the VA wants to make sure that you aren’t refinancing just because you can. Each time you refinance, it costs money. You’ll pay the VA funding fee of 0.5% plus the closing costs the lender and title company charge. These fees can add up to several thousand dollars, which can eat away at the benefits of refinancing. Having that net tangible benefit helps to make sure that the refinance is worth it.

Lender Overlays

These are the basic guidelines set forth by the VA. Each lender can have additional guidelines on top of this. As we suggested above, make sure that you shop around. Find a lender that is willing to stick with the VA’s guidelines and nothing more.

If this is the case, you’ll be able to refinance your loan if you have bad credit and even if you are upside down on your loan. Lenders don’t have to order a new appraisal; they can use the original appraised value of the home. If your home has dropped in value since then, you may be in luck, just as you may be in luck if your credit score has dropped.

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