A VA cash-out refinance, guaranteed by the U.S. Department of Veterans Affairs, allows borrowers to tap into their home equity while refinancing a mortgage for a better rate or different loan term. Qualified borrowers can even convert a non-VA mortgage into a VA mortgage through the process.
However, VA loans are only available to eligible active-duty personnel, veterans, and surviving spouses. Read on to learn more about the VA cash-out refinance loan and how you could benefit from this mortgage if you’re eligible.
What is a VA cash-out loan and how does it work?
A VA cash-out refinance loan allows you to replace your existing mortgage with a new loan with better terms and lets you take cash out of your home. For example, you might refinance to a new mortgage with a lower interest rate or a shorter term so that you can pay it off sooner.
The process for getting a VA cash-out refi is similar to refinancing any mortgage. You work through a private lender, such as a mortgage company or bank.
The lender will do a thorough review of your finances, so you’ll have to provide paperwork, including:
- Paystubs for the last 30 days
- W-2 forms for the past two years
- Income tax returns for the past two years
- Your VA certificate of eligibility (COE)
- Any other information the lender requests
The lender will also order a professional appraisal to determine the current market value of your home.
Depending on the lender, you may be able to refinance for up to 100% of the value of your home. For example, if your home appraises for $400,000 and you have $100,000 in equity, you could refinance to a $400,000 mortgage and get up to $100,000 in cash, which you can use to meet your needs, such as paying off debts or making home improvements.
However, lenders set their own requirements, and some may require you to maintain equity in the house. In that case, you could not get a 100% loan.
Another benefit of a VA cash-out refinance loan is that the process allows you to refinance a non-VA mortgage into a VA-backed mortgage. By converting to a VA loan, you can eliminate the mortgage insurance required for other loans, which could lower your monthly payments.
Eligibility: Can I refinance with a VA loan?
To get a VA-backed loan, you must present a certificate of eligibility (COE) from the VA. You must meet specific service history and duty status requirements to get a COE. (Use the VA Certificate of Eligibility tool to see if you’re entitled to a COE.)
- For veterans and active-duty service members, you must have served at least either 90 or 181 days of active duty (depending on when you served) or less time if you were discharged with a service-connected disability.
- National Guard and Reserve members qualify with 90 days of active-duty service during wartime or six years of service if not called up for active duty.
- You may also qualify if you are the surviving spouse of a veteran who is deceased, missing in action, or a prisoner of war.
In addition to bringing your COE when you meet with a lender, be prepared to provide financial documents that prove your income and debt situation, such as paystubs, tax forms, and bank account statements.
A COE allows you to refinance a VA loan if you meet the lender’s eligibility requirements regarding credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio. Lender requirements may vary, so ask the lender what’s needed for each of these when you’re shopping for a mortgage. You may receive a lower interest rate if your credit score and ratios are better than the minimum requirement.
|Typical requirements for VA loans:|
|Credit score||Minimum of 620|
|Loan-to-value (LTV) ratio||0% down loans available|
|Debt-to-income (DTI) ratio||Maximum of 41% preferred|
When you get a VA cash-out refinance, you will have to pay the VA funding fee and closing costs.
The VA funding fee is a one-time charge that you can pay at closing or roll into your mortgage, so you pay it off over the life of the loan. The VA cash-out refi funding fee is between 1.4% and 2.3% of the loan amount, depending on your down payment, if you’re getting a VA loan for the first time. If you’ve already had a VA loan, the refi funding fee is between 1.4% and 3.6% of the loan.
Other costs you may have to pay at closing include:
- Loan origination fee
- Appraisal fee
- Real estate taxes
- Title insurance
- Recording fees
- State and local taxes or fees
VA cash-out refinance rates: How do they compare?
While you get a VA cash-out refinance loan through a private lender, the VA guarantees the loan against loss, making the loan a lower risk for the lender. Because of that, lenders can offer VA cash-out refinance rates that are lower than the interest rates they charge on conventional refinance loans or FHA loans. Rates on a VA loan may be 0.25 to 0.50 percentage points lower than conventional and FHA loans.
Borrowers with higher credit scores and lower DTI ratios get better interest rates than borrowers with a less desirable credit profile, regardless of the loan program they choose. To get the best mortgage rate, take steps to improve your credit score and pay off bills before you apply for a refinance loan.
VA cash-out refinance vs. VA streamline refinance
You have two options for a VA refinance: the VA refi with cash out and the interest rate reduction refinance loan (IRRRL), also known as the VA streamline refinance loan.
VA cash-out refinance guidelines allow you to take equity out of your house and refinance a non-VA loan into a VA-backed mortgage. However, you must meet the lender’s requirements for income, credit score, and other financial measures. You also must live in the home you’re refinancing.
A VA streamline refi can be a faster, easier way to refinance if you’re not interested in taking out equity or converting a non-VA loan to a VA mortgage. With a streamline refi, you can refinance an existing VA loan to:
- Lower your interest rate.
- Change the terms of the loan, such as going from an adjustable-rate loan to a fixed-rate loan.
The guidelines for getting a streamline loan simply require that you already have a VA-backed loan and are refinancing that existing loan. A VA streamline loan doesn’t have the credit requirements of the cash-out loan. You also don’t have to plan to live in the home, although you must certify that you currently or used to live in it.
Which loan is right for your situation?
If you want to get cash out or convert a non-VA loan to a VA mortgage, consider a VA cash-out refinance. On the other hand, if you want to lower your interest rate or change loan terms without accessing your home equity, a streamline VA loan may be the better choice.
Are you wondering if a VA cash-out refinance loan is right for you? Talk to a local Finance of America Mortgage Advisor today to learn more about your refinance options.