The VA Streamline Refinance gives veterans with a current VA loan the chance to refinance easily. Without the need to verify your employment, income, assets, credit score, or home value, you can refinance your loan.
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There’s one catch – you have to have a net tangible benefit. Loosely speaking, this means a lower interest rate. That’s the general requirement for the VA IRRRL program;after all, it is called the Interest Rate Reduction Refinance Loan.
But, there are exceptions to this rule. Your payment may increase or decrease and you still may be able to secure an approval.
Keep reading to learn how this is done.
The Payment Decrease Requirement
If you follow the basic rules of the VA IRRRL program, you’ll refinance only to secure a lower interest rate. Naturally, with a lower interest rate, your payment will decrease. Because the VA streamline loan doesn’t allow you to take any cash out of the equity of your home, your loan is restricted to the total of:
- The outstanding principal balance of your current VA loan
- The allowed closing costs
- The funding fee
- Any prepaid interest you owe
That’s it. You can’t include the payoff for any other liens. You also can’t include any other debts, such as credit card debt or personal loans. Because the loan amount should be fairly close to your original loan amount (or lower if you’ve had it for a while), your payment should decrease.
If the payment does go down, you satisfy the net tangible benefit requirement.
The Payment Increase Restrictions
Sometimes borrowers end up with a higher payment after refinancing with the VA IRRRL. While it seems to go against the rules of the VA IRRRL, there are ways to make it work.
There is one major rule you must follow – the payment cannot increase more than 20%.
Find out if you are eligible for a VA loan.
You might wonder why you would end up with a higher payment. It happens in one of two situations:
- You refinance from an ARM to a fixed rate loan
- You refinance into a shorter term
The higher rate on a fixed rate loan can make a payment increase even if your loan balance fell a little bit. The shorter term can also increase your payment because you have less time to pay off the loan in full. You’ll pay more principal with each payment, which will increase your payment.
The VA has set 20% as the threshold for how much a payment can increase before you need to fully verify your qualifications for the loan. This is likely due to the fact that the VA requires lenders to make sure you have no late payments on your mortgage in the last 12 months. If you can pay your mortgage on time, the VA feels confident less than a 20% increase will make you likely to default.
Of course, each of these situations is up to lender discretion. The VA doesn’t fund the loans – the lender does. If you apply for a VA loan with a different lender other than your current lender, which you can do, you may find a lender that wants more verification to make sure you won’t default on the loan.
Just what can a lender require? It’s really up to their discretion. They may want to pull your credit to get a closer look at your liabilities and/or payment histories. They may also require that they verify your income, especially in the case of a higher payment. Because each lender has their own requirements though, take your time and shop around. You might be surprised to find lenders that just follow the VA rules and let you refinance even with a higher payment.
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