Did you know you can refinance your VA loan without an appraisal? It sounds crazy, but it’s true. The VA IRRRL or Interest Rate Reduction Refinance Loan makes it possible. In fact, you don’t even need proof of your income, assets, or credit score!
The VA bases your eligibility on the fact that you have a current VA loan as well as your mortgage payment history on that loan. As long as you did not pay your mortgage more than 30 days late more than one time in the last 12 months, you may qualify for the loan.
The only other requirement the VA has is that there is a benefit for the loan. We will discuss this in detail below.
The Net Tangible Benefit
The VA looks for what they call a ‘ net tangible benefit.’ This means that you benefit from the new loan in some way.
The most common way is with a lower payment. You accomplish this by securing a lower interest rate. You refinance your loan and save money – what’s not to love? This is the easiest net tangible benefit to prove. The VA doesn’t have a specific amount of money you must save each month either. The more you save, though, the better your chances of approval.
You don’t have to rely on a lower interest rate to be eligible for the VA IRRRL, though. You can also prove it by refinancing from an adjustable rate loan into a fixed rate. In this case, your payment may increase slightly as fixed rate loans often have higher interest rates than ARMS still in their introductory period. However, the VA sees this as a benefit because an ARM loan is much riskier than a fixed rate loan. Taking on the fixed rate gives you a more predictable loan.
You can also qualify if you refinance into a shorter-term loan. Let’s say you currently have a 30-year loan, but want to refinance into a 15-year loan. Again, your payment will increase, but the VA sees this as less risky. You’ll pay the loan off in half the time. This puts the VA at a much lower risk of default.
You’ll have to be careful, though, if you choose either of the last two options. If your payment increases, it cannot increase more than 20% in order to avoid the need for an appraisal and provide proof of income. If the payment increases more than 20%, you’ll need to verify everything, essentially using the standard VA refinance program.
The Reason you Don’t Need an Appraisal
It still might seem crazy that you don’t need an appraisal for your refinance. Doesn’t the VA want to know how much your home is worth before they refinance your loan? Here’s the lowdown.
The VA already guaranteed a loan on your property. Whether you refinance or not, they have a loan that they will pay back. If you refinance using the VA IRRRL program, you have to have a net tangible benefit. This benefit is for not only your benefit, but also that of the VA.
For example, let’s say you have a 30-year fixed rate loan with a rate of 5.5%. Today, rates dropped and you could get a 5.0% rate. You’ll have a lower payment which means it’s easier to afford. There’s no need for the appraisal since the VA already guarantees a loan in your name. The lower payment decreases the risk of default, putting the VA in a better position. The chances of them having to pay off your loan are much lower than before.
The VA’s main focus is on your payment patterns. If you made your mortgage payments late in the past, they are less likely to give you a new loan. However, if you have a solid payment history, they will gladly guarantee a new loan that is even less risky for them.
Refinancing your VA loan without an appraisal is an easy process. You save money and have very little documentation to provide. In the end, you have a lower loan payment and may even own your home faster depending on the term and rate you chose for your new loan.