Many military veterans are considering refinancing their VA Loan due to mortgage rates being near historic lows. There are several benefits to refinancing your VA Loan, including a lower monthly payment, better terms, and potentially being able to pay off your VA Loan more quickly. Your credit score is one of the most important factors to consider when you apply to refinance your VA Loan, but it isn’t the only factor. Let’s take a look at what lenders look at when you apply to refinance your VA Loan.
What Credit Score do You Need to Refinance a VA Loan?
The first question that often comes to mind when considering a VA Loan refinance is what credit score is needed to qualify for the loan. This is an important factor to consider, but it isn’t the only factor you need to look at. Most mortgage lenders also take other factors into consideration when approving a refinance application. Some of these factors include your debt to income ratio, credit history, and the amount of home equity, or ownership you have.
You need a good credit score. Each lender has a different minimum credit score requirement for refinance approvals. However, you should assume that you need your credit score to be in a high credit score range. If your credit score isn’t high, hen you should work to improve your credit score before your apply for a refinance loan, which will help improve your chances of having your VA Loan refinance approved.
Debt to income ratio. Your debt to income (DTI) ratio represents the percentage of the monthly gross income that goes toward paying your fixed expenses such as debts, taxes, fees, and insurance premiums. Lenders us your DTI ratio as an indicator of cash flow to see how what percentage of your income is going toward fixed costs. Lenders use different standards for loan and refinance approvals, but the thing to remember is a lower DTI ratio is better than a high DTI ratio.
Credit history. Lenders use your credit history to verify how well you have handled credit in the past. Past performance isn’t always an indicator of future performance, but it has proved to be useful for lenders. A few blemishes may not hurt your chances of a VA Loan refinance, especially if they happened some time ago, since recent credit history is weighted more heavily. If you have problems with your credit history, then it may be best to try and clean things up for a few months before applying.
Home equity. The larger the percentage of your home yo own, the easier it may be to get approval for a refinance loan. Lenders typically prefer the owner to have around 20% home equity before they will approve a refinance loan, but this isn’t a hard rule with all lenders. There are also some government programs available for people who have less than 20% home equity.
What if Your VA Loan Refinance Application is Declined?
Lenders can approve or decline a refinance application for a variety of reasons, so your best course of action is to speak with the loan officer who declined your application and ask him or her to explain why your loan application was declined and if they have any recommendations you can use to improve your odds of being approved for a future VA Loan refinance application. You should also be aware that a new law will soon require lenders to give you a free credit score when they decline your loan application. This information can be helpful in determining your next steps to improve your credit score, or work on other areas, such as improving your debt to income ratio, improving your credit history, or increasing your amount of home equity.