Did you know you could refinance your VA loan with very little verification? It’s possible to refinance without verifying your income, assets, or credit score. It gets even better! You don’t have to verify the value of your home. Yes, you do not need an appraisal. This is a possibility for borrowers with a fixed-rate or an ARM loan.
You might wonder what happens if you are upside down? You owe more than the home is worth. You can still refinance! The VA allows it because they figure you can afford a lower payment easier, so the value of the home doesn’t matter.
There are two caveats – you must have made the last 12 mortgage payments on time and you must have a net tangible benefit. That net tangible benefit is usually a lower payment. However, what happens if you have an ARM loan? Refinancing into a fixed-rate could mean a higher rate and/or payment. Does this disqualify you?
Luckily, the answer is ‘no.’ You may still be eligible for the VA IRRRL. You must meet the following requirements.
Low Payment Shock
The biggest factor, aside from a timely mortgage payment, is the amount of the payment shock. Refinancing from an ARM to a fixed-rate usually results in a higher payment. This is especially true if you refinance before the ARM adjusts. That teaser rate can be much lower than a fixed-rate. It’s when the rate starts adjusting that problems start occurring.
If you refinance before that adjustment date, you’ll likely see an uptick in your mortgage payment. But, with the VA IRRRL, you don’t have to verify your income, so it shouldn’t matter, right? It’s true to a point. Your payment can only increase up to 20%. If it increases more than 20%, you will not be able to use the VA IRRRL program. But, if you stay within the 20% threshold, you are in good shape.
Timely Mortgage Payments
The basis behind the VA IRRRL program is that you can comfortably afford your current payment. When you refinance from an ARM to a fixed-rate, you eliminate that element of risk of the adjusting rate. However, you are increasing the payment. The VA requires that your last 12 months of payments were on time. They do allow an exception for one 30-day payment. Many lenders don’t allow this exception though. The lender gets the final say – meaning, they can add restrictions on top of what the VA requires.
If you are increasing your payment, the last thing a lender wants to see is a 30-day late payment in the last year. If you can’t afford your current payment, what makes a lender believe you’ll be able to afford the higher payment?
Of course, like we said before, a fixed-rate loan is less risky. The payment never changes, so the lender doesn’t have to worry about affordability in the future. Keeping that timely mortgage payment history is the key to approval, though.
Pay the Closing Costs
When you refinance any loan, you have closing costs. The VA does allow borrowers to wrap the costs into their loan. However, this increases the principal and therefore the payment. When you refinance from an ARM to a fixed rate, you’ll likely see an increase in the payment already. It’s best if you pay the closing costs yourself. This includes the 0.5% funding fee that the VA charges. Let’s say you borrow $200,000, you’d pay a $1,000 funding fee.
If you can pay these fees upfront, you’ll need to verify the assets you’ll use to pay the fees. This along with the mortgage payment history are the only items the lender will need to qualify you for the VA IRRRL program.
The VA IRRRL program is easy to qualify for, even if you refinance from an ARM to a fixed-rate. You may have to shop around to find a lender that will approve your loan, though. Because you are taking on a higher payment, you become slightly risky. If you aren’t using your existing lender, apply with at least 3 other lenders. See what they have to offer and choose the loan that saves you the most money in the long run.