VA Cash-Out Refinance Loan
A VA Cash-Out refinance allows eligible borrowers to tap into their existing home equity by replacing their current mortgage with a loan backed by the Department of Veterans Affairs (VA).
This program – available to eligible Veterans, military service members and their spouses – offers many of the same benefits of a standard VA home purchase loan, while giving borrowers a chance to tap into cash from their home equity for major purchases or home renovations. VA Cash-Out refinances are available to homeowners with both VA and non-VA loans, so you don't need to be a current VA borrower to qualify.
Whether you want to take cash out of your home or to take advantage of better rates and terms, a VA Cash-Out refinance may be a great option. In this guide, we'll explore everything you need to know about this program so you can decide if it's right for you.
A VA Cash-Out loan is a powerful tool for any eligible homeowner because it's a flexible mortgage option. Here are a few benefits connected to this type of refi.
Unlike the VA Interest-Rate Reduction Refinance Loan (IRRRL), the VA Cash-Out refinance loan is available to any homeowner, not just those who already have VA loans.
Whether you have a conventional loan or another government-backed loan, you can take advantage of this program as long as you meet the VA's eligibility requirements and your lender’s guidelines.
When you refinance a non-VA loan under this program, you can also drop any existing private mortgage insurance (PMI) that you're paying under your current loan terms. The VA doesn't require PMI for its loans, regardless of how much you put down.
However, you will have to pay the VA Cash-Out refinance funding fee, which is 2.3% of the total loan amount if it’s your first time using your VA home loan benefit. We'll discuss this in more detail below.
As with any type of cash-out refinance, the ability to convert your home equity into cash is one of the biggest benefits of a VA Cash-Out refinance. Because mortgage rates can be lower than interest rates on other types of debt (such as credit cards), a VA Cash-Out refinance can be one of the least expensive ways to finance home renovations or other major purchases.
For instance, say you want to fund a kitchen remodel that will cost you $40,000. If you have that much home equity available, you can use a cash-out refinance to pay for it at roughly 5%-6% interest over 15-30 years. That's much more affordable than paying 17% interest on a credit card.
For a cash-out refinance, the VA doesn't have a maximum loan-to-value (LTV) limit, so you may be able to borrow up to 100% of your home's value. In many cases, you can even add the VA funding fee and other closing costs on top of that. But note that the lender ultimately sets the limit, and many lenders cap VA Cash-Out maximum LTVs at a lower amount.
Many of the requirements for a cash-out refinance are similar to a VA purchase loan, but there are some additional VA Cash-Out refinance guidelines you'll need to meet. The main eligibility requirements are as follows:
All VA loans require Veterans to meet one of the following minimum military service requirements:
Your lender will need to confirm your VA Certificate of Eligibility, which verifies that you meet these requirements.
You must live in the home that will be paid for with the VA loan. As such, you need to prove that the home is your primary residence.
Read more about VA loan occupancy requirements.
VA refinances generally require that you gain a net financial benefit from refinancing. This means your refinance loan must:
If you're refinancing another VA loan, you must meet the VA's requirements for "seasoning." While this varies by lenders, typically your current loan must be more than 210 days old and you must have made at least six payments on it.
If you're refinancing from a non-VA loan, you'll need a VA-specific appraisal to verify that your property meets the VA's minimum property requirements (MPRs). The MPRs are designed to verify that your home meets minimum safety, sanitation and size standards for the VA to back your loan.
Although the VA permits borrowers to borrow as much as 100% of their home value, some lenders may ask that you retain some equity in your home. Additionally, many lenders will not allow your total monthly debt payments to exceed 41% of your after-tax income.
Your maximum loan amount may also depend on how much VA entitlement you currently have. If you have previously borrowed a VA-backed loan and have not yet fully paid it off, you will have less entitlement available, and this will lower your maximum available loan.
For a VA Cash-Out refinance, most lenders will ask for a FICO score of 620 or better. In some cases, lenders might accept a FICO score as low as 580.
Remember, the VA doesn't directly provide the funds for your cash-out refinance. It backs the loan, but your lender underwrites it. Each lender will have its own specific requirements, so check with several to compare your options.
VA Cash-Out refinances provide a low-cost way to fund a variety of major expenses. Many borrowers use them to pay for home improvements such as a bathroom remodel or a home addition. But you're not limited to using the funds for home projects.
For instance, you can use cash from your home equity to pay for major medical expenses or college tuition, or you can pay off high-interest debts. Once you've secured the loan, the money is yours to use as you wish. That said, it's not generally a good idea to use home equity to pay for luxury purchases such as a new high-end entertainment system. The value of these types of goods won't last for the life of the loan.
A VA Cash-Out refinance isn't your only option for tapping into your home's equity. Because a cash-out refinance replaces your existing mortgage, it may not even be the best choice in some cases. If interest rates are higher now than they were when you took out your original loan, for instance, it might not make sense to refinance (and the VA might not allow it) only to see your interest and monthly payments go up.
In that situation, you might consider a home equity line of credit. Also known as a HELOC, this allows you to cash out home equity, but it's a second mortgage that doesn't entirely replace your current loan. That means you'd only pay a higher rate on the second loan, and you could set it up with different loan terms.
In other cases, you may be able to take out a loan that's designed for how you'll use the funds, such as a student loan for tuition expenses. Keep in mind, though, loans that aren't tied to your home equity will tend to have higher rates than a VA Cash-Out refinance. The benefit of this option, however, is that you're not risking your home as collateral.
Refinancing isn't free. Like your original mortgage, a VA Cash-Out refinance requires closing costs. The most significant of these, as noted above, is the VA funding fee. If it’s your first time using your VA home loan benefit, this will be 2.3% of your total loan amount. If you've purchased or refinanced with the VA before, your funding fee will be 3.6% of the total loan amount.
For example, on a $200,000 loan, your VA funding fee for a first-time VA borrower would be $4,600, regardless of how much equity you have in your home. If it’s not your first VA loan, you would pay $7,200.
Other cash-out refinance costs may include lender fees, title fees, appraisal fees and more. Your lender should provide a full loan estimate itemizing these fees before you commit to the loan.
Paying these costs out of pocket may be a significant hurdle for many borrowers. In many cases, you can roll your VA funding fee and other closing costs into your loan to pay it over time. Keep in mind that this will increase the total interest you pay over the life of the loan. It will also limit how much equity you can cash out, so this method might defeat the purpose of doing a cash-out refinance.
If you're already a VA borrower and want to limit your costs, it's worth considering a VA IRRRL instead of a cash-out refinance. This loan comes with a much lower funding fee of only 0.5%. This loan does not allow you to convert equity to cash, however, so it may not be a good option if that's your primary goal.
The application process for a VA Cash-Out refinance is similar to the process involved in applying for a VA purchase loan. You'll need to find a few lenders that offer this type of loan and apply for preapproval. This allows you to compare important loan features such as their VA Cash-Out refinance rates, terms, max LTV ratios and more. Once you decide on a lender, it usually takes about 45 to 60 days to close on your new loan.
For more information, visit our VA lender comparison to start the process today.
