Can One Late Payment Make you Ineligible for a VA Streamline Loan?

The VA Streamline Refinance Loan gives veterans the option to refinance their current VA loan with little verification. The VA doesn’t require veterans to prove their current credit score, debt ratio, or their loans LTV. Basically, the VA allows lenders to use the original qualifying factors that veterans used for their current VA loan. The one exception is their mortgage payment history. You must be able to prove that you paid the last years’ worth of mortgage payments on time.

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Does that mean just one late payment will make you ineligible? We take a look at the answer in depth below.

How a Late Payment Affects Your Chances

Technically, lenders want to see that you make all of your mortgage payments on time. This shows them financial responsibility. A borrower that makes their mortgage payments late is not a good risk for a lender. Since you can use any lender you want for the VA IRRRL program, chances are that a new lender won’t want to take a  chance on you based just on your payment history if there are late payments.

However, there is an exception. The VA does allow borrowers to have one late mortgage payment and still be eligible for the VA IRRRL program. It’s up to the funding lender if they want to take the chance. However, the VA has strict rules regarding when this late payment could happen and you still be eligible:

  • Your last 3 months of mortgage payments must have been on time
  • The late payment could occur within the 9 months preceding the last 3 months

For example, if it’s currently February and you had a late payment in December, you would not be eligible for the VA IRRRL. But, if the late payment occurred in September, you may be eligible if the lender allows it.

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The lenders have the final say because they are the entities funding the loan. The VA just guarantees 25% of the loan. As long as lenders follow the VA’s basic guidelines, they can add their own requirements as much as they want. Many lenders won’t accept borrowers with a late payment because they worry it will happen again.

Taking Care of the Late Payment Issue

So what should you do if you have a late payment? The first step is to bring the loan current. Then from there, make sure you don’t make any more late payments. If you are lucky enough to find a lender that doesn’t require a 12-month clean mortgage payment history, you can just wait until 3 months pass since your last missed payment. If you can’t find a willing lender, your only other option is to wait until a full 12 months pass to try again.

The Other VA IRRRL Requirements

Keep in mind, the VA does have other requirements for the VA IRRRL program that go beyond the mortgage payment history. You’ll need to meet the following in order to qualify:

  • You must prove that there is a net tangible benefit for the refinance. This usually means a lower payment, but it’s not the only option. You could refinance from an ARM to a fixed rate or from a 30-year term to a 15-year term.
  • You must prove owner occupancy in order to qualify for the loan. However, this doesn’t mean you must live in the home moving forward. You just have to prove you lived there prior to applying for the refinance.

Again, lenders may add to these requirements. For example, it’s not uncommon for lenders to pull your credit or to run an automated valuation on your home. They do this in order to minimize the risk your loan poses to them. For example, if your credit score dropped dramatically from the original score used to qualify for your VA loan, a lender may be leery about giving you a loan.

The Benefit of the VA IRRRL

The VA IRRRL offers many benefits for veterans, making it well worth the effort to have a timely mortgage payment history.

Most notably, is the ability to refinance when you owe more than the home is worth. This situation is becoming less common today as home values continue to climb, but there are still borrowers out there that are trying to get out from underneath the housing crisis mess. If you find a lender that doesn’t look up the value of your home, you can refinance and get yourself out from being underwater faster.

The other benefits of the program include:

  • The ability to refinance even if you make less money now or you changed jobs. You don’t have to verify your income unless the lender sees a red flag that makes them want to verify your income. For example, changing jobs last week could be a red flag. Waiting until you are at your new job for at least a few months could help eliminate that risk.
  • The ability to refinance even if your credit score is not as high as it was with your first VA loan. Again, you need to find a lender that doesn’t pull your credit score, but there are several out there. As long as you have the timely mortgage payment history and you can prove it without your credit report, the lender won’t know that your credit score dropped.

Basically, the VA IRRRL gives you a chance to refinance even if things aren’t as good as they were when you first got your VA loan. One late payment may not mean the end of your chances for a VA IRRRL.

You may have to shop around and find a lender willing to give you a loan at face value, though. Ask lenders before you apply, what lender overlays they have in addition to the VA’s requirements. This way you’ll know ahead of time if you may have an issue with qualifying with a particular lender.

The good news is that there are hundreds of lenders out there, many of which are not in your immediate area. Doing your research and shopping around is the best way to get the loan that suits your needs the most.

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