Chances are, when you first applied for your VA loan, your credit score was a concern. You likely worried whether or not it was high enough to qualify. If you have the VA loan, it means you qualified. What if you want to refinance it, though? Maybe rates decreased and you want to save money every month. What is the minimum credit score for a VA refinance? The good news is if you use the VA IRRRL Refinance, your credit score is not a concern.
Why do you Want to Refinance?
First, start with the reason you want to refinance. If you have equity in the home that you want to tap into, you need a cash-out refinance. This is a fully verified loan. You must prove your credit score, income, assets, and the value of your property to get the loan. However, if you just want to lower your interest rate, you have another option. The Interest Rate Reduction Refinance Loan, otherwise known as the IRRRL, gives you the chance to refinance with very little verification. However, you cannot take cash out of your equity. The main purpose of your refinance must be to lower your payment.
What is the Minimum Credit Score Required?
As much as you had to worry about your credit score when you obtained your VA loan, you do not have to give it a second thought with the IRRRL. The VA does not require lenders to pull your credit to refinance for a lower rate. They do require you to have a current VA loan that you paid on time for the last 12 payments. You also must prove that you benefit from the refinance. The most typical benefit is to lower the interest rate, which lowers your monthly payment.
The VA concerns themselves with your disposable income each month. They care more about how much you have for daily living expenses than they do your credit score or debt ratio. If you lower your mortgage payment, it means you have more disposable income each month. The VA considers this a benefit and allows the refinance.
Why you Do not Need an Appraisal
It may surprise you to hear you do not need an appraisal either. Just like the VA does not require your credit score, though, they do not need to know the value of your property. For some borrowers, this may even mean they are upside down and can refinance. Owing more than your home is worth is a scary situation to be in and the VA understands that. If they required an appraisal on every loan that needed a lower interest rate, more homeowners would be unable to refinance. This puts the VA loans at risk for default.
As long as you can prove you can afford your current payments, the VA willingly refinances your loan for a lower interest rate. This decreases the risk of default that they face. With a lower payment, you are more likely to continue to make payments even if you are upside down on the loan. Without too much default, the VA can continue to guarantee loans for the veterans of our country.
Watch Out for Lender Overlays
Keep in mind, though, that lenders can have their own overlays on loan programs. They have to abide by what the VA says, but they can also add more requirements. The only thing they cannot do is have fewer requirements than the VA allows.
Because of this, you may find a lender or two that want to pull your credit. Whether they focus on your credit score is another story. Some lenders want to see that you do not have a very shady credit history, such as late payments on any other debts. Others do have a minimum credit score they require for any loan, despite what the VA says.
The good news is you can shop around with different lenders Not every lender will require a credit score. If you have questionable scores right now and want to refinance, find a lender willing to overlook the need to pull the credit history.
Have a Good Reason for the Refinance
Basically, the VA and lenders want to hear a good reason for you to refinance. The lender basically has to trust your ability to repay the loan based on your housing payment history. Because of this, they want to hear plausible reasons for refinancing. The most obvious reason is to lower your interest rate. A few others include:
- Save money on interest every month to pay back the principal faster
- Lower the payment to have more money for daily living expenses
- Lower the payment to pay for an unexpected medical payment or other issue that arose recently
If you do come across lenders who require a minimum credit score, make sure you have compensating factors to help your case. If you have a score that is close to what they require, certain other factors may allow them to overlook your lower score.
For example, if you greatly increase your disposable income with a refinance, this shows that you can easily afford the new payment. Other examples include:
- Reserves on hand to make your mortgage payment if your income were to stop
- Long-standing stable employment with no gaps in your employment history
- Increasing income year after year
- Few other debts aside from the mortgage
The good news is you do not need a minimum credit score to secure a VA IRRRL. However, do not overlook the fact that any lender can pull your credit after you apply for the loan. Some do so just to make sure nothing stands out as a red flag on your report. Others truly want to see your credit score. Trying to clean your credit history up as much as possible before you apply for the VA refinance is always a smart choice. This way you can ensure that you have as good of a chance as anyone else to refinance your VA loan into a lower interest rate.
Because there are many VA approved lenders out there, though, you have ample opportunity to find one to approve you for a loan. Do not give up if one lender turns you down. There are others out there. Your credit does not get hit for more than one inquiry if you apply for the VA loans within a short amount of time.