Do you want to tap into your home equity to cover the cost of home renovations or upgrades? Or maybe you need cash to consolidate high-interest debt, make a big-ticket purchase or meet another pressing financial goal? You could be eligible for a cash-out refinance if you have a VA home loan. It could also be an option if you have a non-VA loan but qualify for a VA mortgage.
Read on to learn how it works, its key benefits and drawbacks, and how to determine if you’re eligible for a new loan.
Can You Do a Cash Out Refinance on a VA Loan?
Yes, you can do a cash-out refinance on a VA loan if you meet certain criteria. You must also meet the lender’s eligibility requirements to qualify.
What is a VA Home Loan Cash Out Refinance?
A VA cash-out refinance replaces your current mortgage with a new one for a higher amount. The new loan pays off your outstanding mortgage balance, and you receive the difference shortly after closing. There are no spending restrictions, so you can use the loan proceeds however you see fit.
How Does It Differ from Other VA Loans?
Regular VA loans are reserved for purchases, and you cannot access cash. There’s also the VA Streamline Refinance or Interest Rate Reduction Refinance Loan (IRRRL), which also restricts access to home equity, as it’s designed to help you secure a lower interest rate and more affordable monthly mortgage payments.
VA IRRRLs also feature a more streamlined lending process with minimal documentation requirements. You’ll pay a VA funding fee with both alternatives unless you qualify for an exemption.
Who is Eligible for a VA Home Loan Cash Out Refinance?
You’ll need a Certificate of Eligibility (COE) to qualify for a cash-out refinance. This document demonstrates to lenders that you are eligible for VA loan benefits, and you can request it on your own or with the lender’s help.
Lenders will also evaluate your creditworthiness to ensure it meets their minimum threshold, as the VA does not impose a score requirement. In most instances, a score of 620 or better is enough to qualify for a mortgage.
Your income and current debt load will be evaluated to gauge your ability to repay the monthly mortgage payments. Lenders pay specific attention to your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to cover monthly debts. It should be less than 41%, although you could still qualify for a VA cash-out refinance if there are other compensating factors.
The home you’re looking to refinance should also be your primary residence. Remember that second homes and investment properties are not eligible for a VA cash-out refinance.
What are the Benefits of a VA Home Loan Cash Out Refinance?
A few key benefits come with tapping your equity through this type of mortgage.
Access to Cash
The primary draw of a VA cash-out refinance is the ability to convert your home equity into cash. As previously mentioned, you can pull out up to 100% of your home equity. And you’re free to use the funds however you see fit.
Potential for Better Loan Terms
If market rates have changed since you took out your current mortgage, you could qualify for more favorable terms when you refinance. You could also switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage to get predictable monthly mortgage payments.
No Private Mortgage Insurance (PMI) Requirement
Another major perk of taking out a VA cash-out refinance is the ability to skip private mortgage insurance (PMI). It’s generally required with conventional loans if you put less than 20% down and can add hundreds of dollars to your monthly mortgage payment. But you won’t have to worry about PMI as a VA loan borrower.
Potential Risks and Considerations
As with any mortgage product, these home loans also have drawbacks to keep in mind.
Impact on Home Equity
A VA cash-out refinance reduces the equity you have in your home. This can be problematic if you decide to sell or if property values dip in the future. Either way, you could end up upside-down on your mortgage.
Longer Loan Term
A refinance typically resets your mortgage term, which means you could pay more in interest over the loan term since the lender gets more time to collect from you. You’ll also tack on more monthly mortgage payments.
Interest Rate Changes
There are no guarantees that you’ll get a better rate when you refinance. In fact, it could be significantly higher, depending on market conditions, and your borrowing costs over time could follow suit.
VA Home Loan Cash Out Refinance: The Process
If you’re set on applying for a VA cash-out refinance, follow these steps to help ensure a seamless lending experience.
Initial Steps and Pre-Qualification
Start by assessing your current financial situation. Check your credit score to see where you stand, and review your spending plan to gauge how big of a mortgage you can comfortably afford. Also, note how much cash you need and why you need it.
The next step is to get pre-qualified with at least three reputable VA-approved lenders. Doing so lets you know how much you can borrow and with what terms.
Finding a Lender
Compare pre-qualification results to find the most suitable lender. When narrowing down your options, consider lender fees, interest rates, terms and reviews from past and current customers to make an informed decision.
Gathering Necessary Documentation
Before formally applying for a loan, gather the documents the lender will need to process your mortgage application. Be sure to have your COE handy, along with proof of income and any other financial documents the lender may require.
Loan Application
Formally apply for a loan by completing the application online or at a physical branch (if applicable). You’ll also need to specify the amount of cash you want to access. Review your entries before submitting to confirm the application is accurate.
Appraisal and Underwriting
Before the cash-out refinance is formally approved and cleared for closing, the lender will require an appraisal by a VA-approved appraiser to determine how much your home is worth. This is necessary to compute your home equity.
The loan must also undergo underwriting. This involves thoroughly reviewing your financial and credit profile to confirm that your application entries are substantiated by documentation and that you’re a good fit for a VA cash-out refinance.
Closing the Loan
You’ll sign the loan documents at closing to seal the deal. You will also pay closing costs and the VA funding fee – you can elect to roll the latter into the loan. Once the new loan is funded, the cash will be sent to you electronically.
What are the Costs and Fees Associated with a VA Cash Out Refinance?
Depending on the lender and loan amount, you can expect to pay between 2% and 5% in closing costs. There’s also the VA funding fee of 2.15% of 3.3% if you’ve used a VA cash-out refinance before. Again, you can finance this amount with the loan.
How Much Cash Can You Get from a VA Home Loan Cash Out Refinance?
Lending guidelines specify that you access up to 100% of your home’s equity through a VA cash-out refinance. However, most lenders cap this amount at 80 or 90%.
Comparing VA Cash-Out Refinance with Other Refinance Options
Conventional Cash-Out Refinance
A conventional cash-out refinance replaces your current mortgage with a larger loan, giving you the difference in cash. Available to all homeowners, it often comes with higher interest rates compared to VA loans and may require a higher credit score and lower debt-to-income ratio for loan approval.
If your equity is below 20%, you’ll pay private mortgage insurance (PMI). While you can use the cash for any purpose, stricter credit requirements and potentially higher monthly payments can be significant drawbacks.
FHA Cash-Out Refinance
Backed by the Federal Housing Administration, the FHA Cash-Out Refinance is similar to the VA option but accessible to a broader range of borrowers, including those with lower credit scores. You can borrow up to 80% of your home’s value, but the loan requires mortgage insurance premiums (MIP), increasing the overall cost.
Interest rates may be higher than VA loans, making this a good option for those who don’t qualify for VA loans but still want to tap into their home equity.
