July 11, 2023
What Is a VA Cash-Out Refinance?
The Department of Veterans Affairs (VA) cash-out refinance combines two sought-after mortgage opportunities: the VA’s home loan benefits and access to your home’s equity. But is it a good choice for you? Find out the basics about this VA refinancing option before you decide.
Intro to VA cash-out refi
A VA loan cash-out refinance replaces an existing home loan with a new mortgage that has a different rate and term – and comes with a lump sum of funds at closing. You can use the cash however you wish, such as funding home improvements, paying off debt, or buying an investment property. That money comes from your home equity, so your new loan will be higher than your current one.
Like all VA loans, a VA cash-out refinance loan is backed by the U.S. government. That means it has unique benefits that are only available to eligible veterans, servicemembers, and surviving spouses.
Benefits of a VA cash-out refi
When eligible homeowners choose a VA cash-out refinance. It’s often for benefits like these:
Access to more cash
When it comes to the amount of equity you can access, a VA refinance with cash out is more lenient than a conventional cash-out refi. The VA allows you to take out up to 100% of your home’s value. Many lenders will approve up to just 90%, but even that is higher than the conventional standard of 80%.
Competitive interest rate and fees
Because cash-out refinances come with added risk compared with non-cash refis, they often can come with higher interest rates. Fortunately, VA refinance cash-out rates are usually lower than conventional cash-out rates because they are government backed. They also have other VA loan benefits such as no mortgage insurance.
No need for an existing VA loan
Unlike the VA interest rate reduction refinance loan (IRRRL), which requires you to already have a VA loan, a cash-out refi is available regardless of the type of mortgage you used to buy your home. This provides a way to use your VA loan entitlements to access your home equity, even if you didn’t purchase your home with a VA loan.
Eligibility and guidelines
VA cash-out refinance guidelines include five requirements:
1. You already have or are eligible for a VA loan
As mentioned, you don’t need to have a VA loan currently in order to refinance with a VA cash-out refi. The standards differ based on the type of mortgage you have.
● If you currently have a VA loan – You’ve made at least six consecutive payments and must be seasoned 210 days.
● If you don’t currently have a VA loan – Meet the requirements to obtain a VA certificate of eligibility (COE).
2. You’ve built equity in your home
The only way to access cash at closing is to have home equity. You build equity by paying down your mortgage principal and with increases in property value.
Technically, VA loans allow for a maximum loan-to-value (LTV) of 100 percent. This means, for example, that if your home’s appraised value is $500,000, you could potentially borrow $500,000. While some lenders may approve a 100 LTV VA cash-out refinance, it’s more common to use a 90% LTV. Let’s break that down:
Maximum New Loan Amount
$540,000 ($600,000 x .9)
Maximum Cash Out
$140,000 ($540,000 – $400,000)
In this example, the new loan replaces the existing mortgage and provides an additional $140,000 in cash.
3. You meet the financial requirements
Being eligible is different from qualifying for a VA refinance. To get approved for a loan, you must meet the financial standards set by both the VA and your lender. That includes:
- Credit History – The VA doesn’t set a standard, but most lenders prefer a minimum credit score for a VA cash-out refinance of 580 or higher.
- Consistent Income – Proof of income through documentation such as pay stubs, W2s, tax returns, and business profit-and-loss statements.
- Debt-to-Income Ratio (DTI) – The ratio of your monthly debt payments to gross income is 41% or lower.
- On-Time Loan Payments – Proof you’ve paid your current loan on time the past 12 months.
4. Your property meets VA loan requirements
- Property Condition – You’ll need an updated appraisal to determine the current value of your home and ensure it meets the minimum property requirements (MPRs), ensuring it’s safe, sound, and sanitary.
- Primary Residence – VA loans are intended for primary residences and not investment properties.
5. You don’t live in Texas
A VA cash-out in Texas works differently from cash-outs in other states. There, all cash-out refinances must adhere to both the Texas Constitution and VA underwriting guidelines, prohibiting veterans in that state from taking any equity out of their homes with a VA loan.
Costs of a VA cash-out refinance
When comparing loan types, it’s important to look at the costs beyond interest rates. One significant cost to consider is the VA cash-out funding fee, which will vary depending on the loan amount and whether it’s your first or a subsequent use:
After First Use
Because VA loans are backed by the government, the ones funding the loans ultimately are U.S. taxpayers. The VA funding fee is a one-time fee paid by the borrower that helps lower the cost of the loan to taxpayers.
For example: If this is your second VA loan and the amount is $500,000, your VA funding fee could be $16,500. It would be $10,750 if it’s your first use of the VA home loan program. That can sound like a hefty upfront expense, but some VA closing costs – including the funding fee – can be rolled into the loan. And some borrowers are exempt from the funding fee.
Before refinancing and digging into your hard-earned equity, take time to think through whether it is worthwhile. Here are some questions to consider:
- Can you refinance for a lower rate than you currently have?
- Does the refi allow you to get rid of other costs like mortgage insurance?
- Are you comfortable increasing your loan principal and possibly the loan term?
- Have you added up the costs and know how long it will take to break even?
- Do you plan to use the cash to add value to your home?
If you answered yes to multiple points, a VA cash-out refi is likely worthwhile. To find the best VA lender, look for someone with vast experience and a passion for serving military families.
Want more helpful resources? Visit our VA loan hub in the Mortgage Knowledge Center.