As a veteran, you have two refinance options. You can use the VA IRRRL program to lower your payment or the VA cash-out loan to tap into your home’s equity. No matter which program you choose, you will need a timely mortgage payment history. Lenders look at this as one of the main indicators of whether or not you are a good risk.
Can You Have Any Late Payments?
The VA has some of the most flexible guidelines available in the mortgage industry. While they would prefer that you had a flawless mortgage payment history, you may be able to refinance your VA loan even with a late payment in your past.
First, you should know that the VA puts the most emphasis on the last 12 months. If you have a timely mortgage payment history during that time, you don’t have to worry too much about any late payments prior to that point. Of course, a lender will look at them and some lenders may not approve your loan because of them, but other lenders may not care.
Oftentimes, as long as the last 12 months is blemish free, lenders consider it a ‘fresh start.’ That’s why when a borrower has a late payment or any other issue on their credit report, lenders often encourage them to wait 12 months before trying to apply again. Lenders look at 12 months of good payment behavior as adequate time to turn your financial life around.
The VA IRRRL Program Has the Most Lenient Guidelines
The VA IRRRL program, known as the Interest Rate Reduction Refinance Loan, puts a lot of emphasis on the mortgage payment history because that’s all lenders look at on this loan. Lenders are not required to pull your credit, look at your paystubs, or even know the value of your home. The VA allows lenders to rely on your mortgage payment history to determine if you can afford the new loan.
Because you are supposed to have a benefit for the VA IRRRL program, such as a lower interest rate or lower payment, the emphasis is on the mortgage payment history. If you have a timely mortgage payment history with the higher mortgage payment, lenders assume you will be able to easily afford the mortgage with the lower payment.
This is why a 12-month timely history is important. But, the rules are lenient. The VA does allow you to have one 30-day late payment within the last 12 months and still qualify. Lenders often prefer if the late payment is at least 3 months prior to your application for the new VA loan. Of course, not all lenders are willing to accept the late payment. You may have to shop around for lenders that don’t mind.
The VA Cash Out Refinance Has Stricter Requirements
It probably comes as no surprise that the VA cash out loan has stricter guidelines. The VA requires lenders to determine your credit score, evaluate your income, and determine the value of your home. This is because you are taking out a larger loan than you have now. When you tap into the home’s equity, the lender takes a larger risk. Not only does your mortgage balance increase, but so does your payment. This puts lenders at higher risk for default.
Lenders and the VA usually don’t allow any late payments on a VA cash out loan in the last 12 months. They want to know that you can comfortably afford the mortgage you have now before they will consider increasing your loan amount for a cash out refinance.
The degree that late payments affect your chances for a VA refinance depends on the lender. You should shop around with several lenders to see what each requires. Some lenders will have stricter requirements than others. As you shop around, you can determine which lender will accept your circumstances and give you the best interest rate on the loan.