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VA streamline refinance loans, also known as VA IRRRLs (Interest Rate Reduction Refinance Loan), enable veterans and active-duty military personnel to refinance their existing VA mortgage with more lenient guidelines.
Unfortunately, they tend to be leveraged for scams and misleading methods targeting veteran homeowners.
The good news is there are ways to spot and avoid offers that sound too good to be true.
7 Warning Signs of a VA Loan Refinance Scam
According to the CFPB, some deceitful lenders have been targeting VA loan holders with “aggressive and potentially misleading advertising and sales tactics,” aiming to persuade homeowners that refinancing is in their best interest.
Many veterans, active-duty service members, and military spouses have reported receiving deceptive calls and mail. These solicitations often appear official, sometimes even displaying a legitimate-looking seal or emblem, as if they are coming from the VA or your current loan provider. They offer enticing promises that seem far too good not to explore.
Recognizing the signs of a VA refinance scam can help you avoid being a victim.
Here are seven offers and tactics to watch out for:
1. Extremely Low Interest Rates
Sometimes, lenders may lure your response by advertising an extremely low interest rate.
You may incorrectly assume these offers apply to 30-year fixed rate mortgages. However, in many cases, the low rate applies to an adjustable-rate mortgage, a 15-year mortgage, or a rate that buy down by paying discount points.
When making interest rate offers, lenders are required to disclose the terms. Extremely low interest rate offers that lack cost breakdowns and conditions are likely deceptive. If you receive a refinance offer with significantly lower rates than today’s VA mortgage refinance rates without explanation, there is likely a scam involved.
2. No-Cost Refinance Offer
It’s entirely possible to have no out-of-pocket costs when refinancing your VA loan. However, you should be wary when you see the term “no-cost.” Typically, no cost simply means no “upfront costs.”
Some lenders make offers that sound like refinancing is free. It isn’t. You will still incur costs even if those costs are wrapped into the new loan or covered via a higher interest rate.
3. Skipped Mortgage Payments
Lenders sometimes promote skipping one or two mortgage payments as a benefit of refinancing your VA mortgage. The VA, however, prohibits advertising payment skipping as a method of obtaining cash for an IRRRL.
Despite this, some lenders still deceitfully use it as a selling point when they cannot offer cash-out or a significantly lower interest rate.
4. Upfront Fees Prior To Providing Any Services
Scammers will often make offers cloaked as “relief” and ask for an upfront fee to work with your current lender on a refinance. Never, ever pay any fees upfront.
According to the FTC Mortgage Assistance Relief Services Rule, requesting fees upfront before delivering promised results is illegal.
The rule specifies that a company cannot collect any fees until the homeowner has received and accepted an offer of relief from their lender. So, even if you agree to a mortgage relief service, you are not required to pay until the transaction or services have been satisfactorily provided.
5. Cash Back Offers
Some lenders may promise you’ll receive a certain amount of cash by completing a VA Streamline refinance. Typically, this offer is framed as getting cash back by skipping payments or receiving a refund from your escrow account.
While it’s possible you receive an escrow refund if you have cash left over in your current mortgage’s escrow account, many variables come into play to determine your refund amount. When it comes to advertising specific numbers, lenders do not know the amount you’ll have left in your escrow account after all costs are paid. Any offer for a VA mortgage refinance presented with a certain refund from the escrow account should be avoided.
6. Aggressive and Deceitful Sales Tactics
Some lenders may place undue pressure to refinance your VA mortgage.
For instance, you may receive VA refinance offers in the mail resembling a check or bill to ensure you open them. You may also be told that you can refinance your VA loan just a month or two after closing on your current VA loan, which blatantly goes against the VA’s waiting period rules of 210 days.
It’s important to understand that if an offer stands to benefit you, it’s unlikely a lender will pressure you with repeated calls, emails, and texts.
If you’ve received a refinancing offer that requests upfront payment ahead of providing any services, or a “no-cost” refinance, or “no waiting periods,” be sure to do your research before responding.
7. Serial Refinancing
Another way some lenders may take advantage of you is through “serial refinancing.” They get you to repeatedly refinance, collecting fees each time, even though refinancing your loan may come with little if any, benefit.
What to Be Aware Of With VA Refinance Loans
Both the VA IRRRL and the VA cash-out refinance loan can be great ways for veteran homeowners to make use of their VA benefits. Whether you’re looking to get a lower interest rate or take cash out for a home improvement project, VA refinances offer flexible options.
But be aware that a refinance is not always in your best interest. While not illegal, there are certain lender refinance practices that may not always benefit you as a buyer. Here are four you should keep in mind:
100% Lending Offers
VA cash-out refinance loans can be an excellent way to access up to 100% of your home equity at a competitive interest rate. However, some lenders may use a cash-out refinance to strip your home of all its equity. Yes, the cashback to you can be helpful, but the lender can also capture your equity for themselves in the form of fees.
Resetting the Loan Term
Refinancing typically involves resetting the terms of your mortgage to 30 years. While this isn’t always a bad thing, you need to understand that you may have paid down your loan by thousands of dollars in interest already, only to start over with 30 more years, ultimately paying even more interest in the long run.
Savings Claims
Some lenders may mislead you by proposing a cash-out refinance where you’re getting a small amount of cash out, for example a couple of thousand dollars, but say you’re still saving $100 per month. The truth is that a lower monthly payment doesn’t always mean you’re saving money. Lenders often disguise the process of lengthening your term as saving money per month when, in fact, you’re paying more over the long haul.
Closing Costs
Don’t forget about the new costs that come with obtaining a new VA loan. Although the VA funding fee can be rolled into your new loan, closing costs cannot be rolled into a cash-out refinance. This means you’ll have to come up with 2-5% of the loan amount out-of-pocket. Even if the lender offers a “no-cost” cash-out refinancing option, this typically involves you paying a higher interest rate in return for a lender credit. The lender credit then covers some or all of your closing costs. Although this can be a good option, it’s important to understand that a higher interest rate will ultimately mean you’ll pay more over time.
» MORE: See today’s refinance rates
4 Ways to Avoid VA Loan Refinance Scams
Fortunately, there are ways to protect yourself and your finances while still receiving the benefits provided from a VA refinance loan.
1. Verify the Lender is Legit
Scammers may provide details about your credit history, payment history, or current interest rate to deceive you into thinking they are associated with your current bank. If you believe your current lender is making the offer, confirm this directly with your lender before proceeding with the transaction—particularly if you’re relying on the caller or the mailer claiming affiliation with your lender as a reason to refinance.
2. Beware of “Pre-Approved” Offers
When someone says you are “pre-approved,” it doesn’t mean your refinancing is guaranteed. Depending on the type of VA refinance you’re applying for, you may still need to complete the loan application, undergo a credit check, go through the process of underwriting, provide income verification, and possibly even get an appraisal. Ensure you clarify what is meant by “approved” or “pre-approved,” especially if you are considering a refinance based on this.
3. Watch For Excessive Fees
While some offers may be legitimate and provide value, look out for misleading offers that can add thousands to your loan balance and provide little benefit in the long run. Various refinancing fees can be incorporated into the loan and easily hidden. Dishonest lenders might offer an attractive rate and no “out-of-pocket” expenses while imposing exorbitant fees, such as loan discount points, that are financed into the loan. Get two or three closing cost estimates from different lenders to keep them all honest.
4. Don’t Feel Obligated to Accept
It can be tempting to lock in a great rate or save money by refinancing. But if someone seems overly pushy to get you to “act now,” proceed with caution. Taking a day or two to consider the offer or research the company should not significantly change the refinancing terms being offered.
The Bottom Line on VA Refinance Scams
VA refinance loans can be a great way to take advantage of your veteran benefits and entitlement. However, before proceeding with a VA mortgage refinance, be sure to consider the short and long-term benefits along with the consequences of refinancing your loan.
If you suspect a scam, first contact your mortgage lender or the VA to determine whether the offer is real. If you discover it’s a scam, cease all communications with the scammer and contact your State Attorney General’s Office and the Federal Trade Commission.