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A VA cash-out refinance loan could be an excellent choice if you're a former or current military member wishing to refinance your mortgage to a cheaper rate and tap into your home's equity for more funds.
Qualified borrowers can get a VA cash-out refi loan from various financial institutions, but they must be approved by the US Department of Veterans Affairs (VA).
In this post:
VA Loan Ultimate Guide
I built the VA Loan Ultimate Guide to explain the confusing VA loan process.
- What is a VA loan?
- How to determine if you are eligible for a VA loan?
- How to get a VA loan Certificate of Eligibility?
- What credit score do you need for a VA loan?
- What is the VA loan process, from start to finish?
- Who are the best VA loan lenders?
- What is a VA cash-out refinance loan?
Here's a podcast episode from my Military Money Manual Podcast all about using the VA loan:
What Does A VA Cash Out Refinance Loan Mean?
A cash out refinance VA loan can replace your current mortgage loan with a new VA cash out loan when you want to do a VA cash out refinance. New VA home loans will most likely have a higher balance than your old ones.
In that case, at closing, the difference of the additional loan amount will be refunded to you as per the VA cash out refinance guidelines. However, VA loans do not force you to take the VA loans cash out option on your home equity unless you want to use that money for something else.
A veterans cash out refinance loan can also be used to substitute a non-VA loan with a VA loan, which can lower your mortgage interest rate when opting for the VA cash-out refinance rate. Veterans and active military personnel are the only people who can meet the VA cash out refinance requirements and be eligible for a cash out refinance VA loan.
Who Can Apply For A Cash-Out Refinance Loan?
Individuals who may be eligible for a VA cash-out loan include:
- National Guard and Reserve Personnel (called to active duty)
- Active Duty Military Personnel
- Qualifying Surviving Spouses
- National Guard Members
- Current Reserve Members (after six years of creditable service)
Any Veteran or service member must have been discharged for reasons other than dishonorable discharge and must have served for the required amount of time to be eligible.
The Veteran, the Veteran's spouse, or the Veteran's dependent child must attest occupancy for the property as a prerequisite for VA home loans.
How Do VA Cash Out Refinance Mortgages Work?
A cash out refinance VA loan is similar to regular loans, except the individual applying must meet the VA cash out refinance requirements and qualify for the VA cash out refinance rate.
Veterans, just like everybody else, have their reasons for wanting to refinance their existing mortgages. Whether it be for lower interest rates on VA home loans or wishing to switch to a VA cash out refinance loan, everybody wants the best deal and the lowest rate.
In some cases, a VA streamline refinance cash out loan is the best option for those who don’t need cash back. Otherwise, they will need to apply for the traditional VA home loans and qualify per the VA cash out refinance guidelines.
Suppose somebody is currently serving in the military or has been honorably retired from their service. In that case, they will be eligible to apply for VA home loans with no down payment or the ability to refinance an existing loan.
The first step in applying for a VA cash out refinance is to obtain a certificate of eligibility, which validates that you fulfill the service criteria for a VA loan per the VA cash out refinance guidelines.
Getting authorized for a VA cash out refinance is comparable to getting approved for any other type of refinance mortgage. Because VA loans aren't issued directly by the Department of Veterans Affairs but rather through several mortgage lenders, you'll need to fulfill the lender's debt-to-income ratio, credit score, and any other relevant requirements to qualify.
You will need to make preparations to provide a detailed account of your money, including:
- Tax returns and W-2 statements from the previous two years
- Paycheck stubs from the last month
- Any further documentation required by your lender
Your primary residence must be the house you're refinancing. The lender will hire a VA-approved appraiser to establish the house's market value and assure that it fulfills the VA cash out refinance guidelines.
Depending on the lender, you may be allowed to borrow up to 100 percent of the appraised house value. The lender will also examine your debt-to-income and credit-to-income ratios.
For VA loans, each lender establishes its minimum credit score. These FICO minimum scores are generally in the low to mid 600s, but they could be higher if you intend to cash out all of your home equity. Lenders will also examine your credit history to see if it meets the VA cash out refinance guidelines and requirements.
VA Cash Out Refinance Fees and Additional Costs
All VA loans borrowers must pay the VA cash out refinance requirements for fees and closing costs. This is a one-time fee that assists in the continuation of the VA cash out refinance program.
Whether people are applying for VA loans for the first time or not, the amount of the funding charges can vary; for example:
- 2.3 percent for first-time buyers
- 3.6 percent for buyers who have previously taken up VA home loans
The amount charged for the VA cash out refi can also be influenced by the size of the down payment, which isn't required in a VA cash out refinance.
However, the funding charge is required for VA loans at the closing, but you might be able to pay it off with the cash out refinance proceeds.
You should also consider how the interest rate will affect the total amount of the loan. VA loans are deemed less hazardous than ordinary mortgages since the government partially insures them.
As a result, the VA cash out refinance rate is typically lower than standard cash out refinance rates. However, before you apply for a VA cash out refinance, evaluate all your loan choices from several lenders to determine what the best option will be for you.
VA Cash Out Refinance Advantages
The VA home loan cash out refinance option, unlike the VA Streamline Refinance (IRRRL) program, enables you to:
- At closing, you could get up to 100% of your ownership back in cash (however, some lenders will only go up to 90%)
- Get rid of mortgage insurance if you currently have a USDA, conventional loan, or FHA with PMI.
- Convert non-VA loans (such as an FHA or traditional loan) to VA loans.
VA home loans allow for a loan-to-value ratio of 100% (LTV). That signifies you might be able to secure a loan equal to the value of your house. Many other cash-out refinance alternatives have an 80 percent loan-to-value (LTV) limit.
The VA cash out refinance 100 LTV is an excellent option for members of the military who want to use the money back option for paying off their debts or something else.
They might choose to make some home improvements, buy more real estate, take an overdue vacation, or for whatever else they want to use it for. There aren’t any VA cash out refinance guidelines for how people spend their VA cash out refinance money.
Consider the following scenario: Assume an eligible homeowner owns a $400,000 home. They owe $200,000 on their current loan. They may choose to get a new VA cash out loan for up to $400,000 and get $200,000 back at closing, minus the closing costs.
Remember that nobody is guaranteed VA home loans that are 100 percent of the home value. Everybody will still need to qualify by meeting the VA cash out refinance guidelines and their lender’s minimum credit score and DTI guidelines.
What is VA Loan?
A VA loan is a mortgage offered to active duty service members, veterans, and some military spouses. The VA home loan doesn't require a down payment or private mortgage insurance (PMI) on a primary home purchase.
The loan is backed by the Department of Veterans Affairs which allows lenders to provide qualified applicants with a $0 down payment option. Although there is no down payment required, there is a one-time VA funding fee built into the mortgage and you are still responsible for closing costs. Those can range from 1-5% of the total loan amount depending on location.
A qualified person can apply to use any of the following VA loan types:
- VA purchase loans
- VA jumbo loans
- VA construction loans
- VA renovation loans
- VA refinancing loans.
Similar to FHA loans, a VA loan can only be used to purchase a primary residence. If you plan to purchase a rental property or vacation home you will have to opt for a conventional mortgage instead.
The VA is known for having strict requirements that the borrower and home have to meet before they will approve the use of VA loans. Working with a VA mortgage lender that is experienced in all of the requirements will simplify your home buying process.
If you can secure a good interest rate on a VA cash-out refinance loan, and you want to maximize the available equity in your home to use for other things, then a VA refinance loan makes perfect sense.
Remember, VA loans are for military personnel, active and retired members, as well as all Veterans. If you meet the requirements, you can qualify for the best VA cash out refinance rate.
The time periods can differ per lender, but in most situations, the minimum is 210 days from the due date of the first monthly mortgage payment on the cash out refinance VA loan. Borrowers must meet credit, income, and appraisal standards to be qualified for a VA cash out refinance, just as they do for a VA purchase loan.
When the new loan amount exceeds 100 percent of the payment amount of the refinanced loan, it is referred to as a Type 2 cash out refinance. As usual, all data for the new loan should be recorded in the loan summary, and the inputs should match the new loan's final disclosure documentation.
The average time it takes to close a VA cash out refinance is 45 to 60 days. However, each homeowner's circumstance is unique, and one VA cash out loan may be completed sooner than others. It is essential that people review all the VA cash out refinance guidelines before applying for VA home loans. To get an exact estimate on closing time, speak with a VA loan professional.