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How are VA Streamline Rates Determined by the Lender?

February 15, 2016 By Justin McHood

VA loans are specifically for the veterans of our country. It is a loan that makes it easy for those that have served our country to become homeowners. The requirements are easy to meet and the rates are low. The VA Streamline Refinance program, otherwise known as the Interest Rate Reduction Refinance Loan, offers veterans another chance to save even more money by offering low VA Streamline Rates in order to refinance their current VA mortgage. The program is even easier to qualify for than the original VA loan and allows veterans to lower their interest rate, increasing their disposable income while making it easier for them to keep their dreams of being a homeowner. If you are a veteran and your interest rate was only slightly higher than they are today, lowering your interest rate even 0.5% can amount to thousands of dollars in savings over the life of the loan. It is important to not just look at what you are saving today, but what your savings accumulate to over the life of the loan.

Factors that Affect VA Streamline (IRRRL) Rates

The VA Streamline rates are not determined or set by the Department of Veterans Affairs as one would assume. Instead, they are determined by the market, just like conventional loans obtain their rates. The mortgage rates are dependent on the secondary market, where the mortgages are sold. The VA does not hold onto any mortgages; in fact, they do not have a role in the funding of VA mortgages at all. They simply offer the guarantee for the lenders, enabling them to offer loans to what may be a riskier borrower than the bank would be comfortable lending to without the VA’s backing. The secondary market is where investors purchase the mortgages, giving lenders an instant profit and their money back so that they are able to lend to more borrowers.

In general, the better the economy is doing, the higher interest rates go. If you hear that the stock market is struggling, unemployment rates are up, and inflation is going down, then chances are the VA Streamline rates will begin to drop as well. On the other hand, if you hear that the stock market is thriving, jobs are plentiful, and inflation is predicted to rise, then you can expect the VA mortgage interest rates to rise as well. It works on a supply – demand type of relationship – the more money that is out there and available for home purchases, the higher rates go, but if the money is scarce and people are not buying, rates will go down because there is not a high demand and the market needs to be stimulated.

Individual Interest Rates

The standard rate for a 30-year fixed rate VA Streamline refinance is not going to be the same for every borrower. Lenders have a base rate that they are offered by the lending institutions, but then they have adjustments they can make to that rate in order to determine their own profits. Your individual situation will determine the rate you are offered by a lender, but remember that every lender has their own requirements, so shop around with several lenders before settling on a rate.

Credit Score

The first determining factor, and perhaps the largest, is your credit score. This number says a lot about you. Even though the credit score is technically not needed for the VA Streamline Refinance, most lenders will pull your credit anyways because it is such a telling number. This number will tell them if you have been responsible with your extended credit and have been making your payments on time. It will also let a lender know how much of your available credit you have used, which in turn, forces your debt ratio up, which is another factor in determining your interest rate. In general, VA lenders do not like to lend to borrowers with a credit score below 620, but some may if there are other compensating factors for the loan, especially if the interest rate reduction is going to greatly decrease your payment. The higher your credit score (760 is considered perfect) the lower the interest rate the lender will offer you.

Debt-to-Income

As discussed above, your debt ratio also plays an important role in the VA Streamline rates you are offered. Your debt ratio gives the lender an idea of how much outstanding debt you have compared to your gross monthly income. This is yet another factor that the VA does not require lenders to verify, as your income does not need to be re-verified in order to qualify, however, most lenders want to see where you stand before extending credit to you. If you have a debt ratio higher than the average of 35%, your interest rate could be negatively impacted in order to make up for the risk that a higher debt ratio provides.

Loan Term

The last factor that you have control over when determining the VA Streamline rates that are offered to you is the loan term. Generally, the shorter the term, the less risky the loan is for the lender. This means that a 15-year term will provide lower interest rates than the 30-year term. It is important to remember that your payment will be higher with a 15-year term despite the lower interest rate because the principal amount of the loan will be amortized over a shorter period of time. In the end, however, you pay less interest and have the loan paid off faster.

VA Streamline rates are among the lowest rates available to veterans. Even if you qualify for a conventional loan because you have good credit, a low debt ratio, and steady income, it is worth exploring your options as a veteran. The fees on the VA loans are not high and can even be rolled into your loan, leaving you with even more cash in the end. Make sure to compare the rates for all programs that you qualify for in order to ensure that you are making the right decision for your family.

Filed Under: Streamline Refinance

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