What is a VA Cash-Out Refinance?

 The Department of Veterans Affairs (VA) has long provided a number of benefits for our nation’s bravest, including their VA home loan programs. One such opportunity the VA provides is the VA cash-out refinance.

Any eligible borrower can take advantage of a VA cash-out refinance, whether they already have a VA loan or not. But how do you know if it is the right refinance option for you? In this article, we will review what a cash-out refinance entails, how to know if you meet the VA’s requirements, and more.

What is a VA cash-out refinance?

A VA cash-out refinance combines two attractive mortgage opportunities: the VA’s home loan benefits and access to your home’s equity. This type of refinance replaces your existing home loan with a new mortgage that comes with a different rate and term, plus a lump sum of funds at closing.

It is important to note that this surplus of money comes from your home’s equity, so the new loan will be larger than your current mortgage. However, you are able to use the extra cash for whatever you need, including:

• Home improvements

• Debt consolidation

• And more

As is the case with all VA loans, a VA cash-out refinance is backed by the U.S. government. This means it has unique benefits that are only available to eligible veterans, servicemembers, and surviving spouses.

How does a VA cash-out refinance work?

Similar to other refinance options, you must ensure that you meet the borrower qualifications and that your current mortgage has met its seasoning requirements before applying for a VA cash-out refinance.

On top of your lender’s standards, you will also need to meet the VA’s qualifications to be approved to use their benefits.

VA cash-out refinance eligibility requirements

The great news is that your current mortgage does not need to be a VA loan in order for you to qualify for a VA cash-out refinance. However, there are requirements that homeowners must meet in order to be eligible, including:

1. You already have, or are eligible for, a VA loan

As mentioned, you do not need to currently have a VA loan in order to take advantage of a VA cash-out refinance, but the specific standards for borrowers do differ based on the type of mortgage you have.

If you currently have a VA loan, you must have made at least six consecutive payments in order for it to meet the 210-day seasoning requirement.

If you do not currently have a VA loan, you must meet the service requirements to obtain a VA certificate of eligibility (COE), along with confirming your current mortgage has met its specific seasoning requirements.

2. You have built equity in your home

The only way to access cash at closing is to have enough home equity. Equity is built by paying down your mortgage principal, but it also increases as the value of your home rises.

VA loans do allow for a maximum loan-to-value (LTV) of 100%, meaning with 100 LTV you could borrow 100% of your home’s value. Most lenders, though, will only allow you to use up to 90 LTV. Here is an example breaking it down:

Home Value	$600,000
Equity	$200,000
Current Mortgage	$400,000
Maximum New Loan Amount	$540,000 ($600,000 x 0.9)
Maximum Cash Out	$140,000 ($540,000 – $400,000)

As you can see above, the new loan replaces the existing mortgage and provides an additional $140,000 in cash.

3. You meet the financial requirements

The most important takeaway to remember is that VA eligibility is different from qualifying for a VA refinance. To be approved for a refinance loan, you must meet the financial standards set by both the VA and your lender. That includes:

• Credit history: The VA does not set a standard, but most lenders prefer a minimum credit score for a VA cash-out refinance of 620 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.

• History of on-time loan payments: Proof you have paid your current loan on time for the past 12 months.

4. Your property meets VA loan requirements

Similar to borrower requirements, your property must also meet standards set by the VA and your lender, like:

• Property Condition 

You will need an updated appraisal to determine the current value of your home and ensure it meets the minimum property requirements (MPRs), ensuring it is safe, sound, and sanitary.

• Primary Residence 

VA loans are intended only for primary residences, meaning investment properties will not qualify.

5. You do not live in Texas

A VA cash-out in Texas works differently from cash-outs in other states. All Texas 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.

VA cash-out refinance costs

When comparing loan types, it is 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 is your first use or a subsequent use: 

First Use	Subsequent Use
2.15%	3.3%

Source: VA.gov

The VA funding fee is a one-time fee paid by the borrower that helps lower the cost of the loan to taxpayers. That can sound like a hefty up-front expense, but the funding fee and some other VA closing costs can be rolled into the loan. Plus, some borrowers may be exempt.

A home appraisal will also be required in order for you to obtain a VA cash-out refinance. This step is vital, as it will help your lender determine how much home equity you are able to tap into and ultimately determine the maximum loan amount you are eligible for. It also ensures that your home meets the VA’s minimum property requirements (MPRs).

VA cash-out benefits

Meeting all of the necessary qualifiers to be approved for a VA cash-out refinance is one thing, but how do you know it is the right option for you? Eligible homeowners choose a VA cash-out refinance for a number of reasons, including benefits like:

1. Access to more cash

When it comes to the amount of equity you can access, a VA refinance with cash out is typically more lenient than a conventional cash-out refinance. Many lenders will approve up to just 90%, but even that is higher than the conventional standard of 80%.

2. Competitive interest rate and fees

VA cash-out refinance rates are usually lower than conventional cash-out refinance rates since they are government backed and therefore less of a risk to lenders to provide. They also have other VA loan benefits, such as no mortgage insurance.

3. No need for an existing VA loan

A VA cash-out refinance is available regardless of the type of mortgage you used to buy your home, unlike the VA interest rate reduction refinance loan (IRRRL). This provides a way to use your VA loan entitlements to access your home equity, even if you did not purchase your home with a VA loan.

Is a VA cash-out right for you?

If you are currently shopping around for a refinance that is a good option for you, it is important to take your time researching your options. Ask yourself:

• Can you refinance for a lower rate than you currently have?
• Does the refinance 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?

Remember, a mortgage refinance is meant to benefit you and help you achieve your financial goals. If you answered yes to a bulk of the questions above, then a VA cash-out refinance is likely a worthwhile option to consider. However, it is best to consult with a lender who specializes in VA loans and can walk you through the process with confidence.