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VA Cash-Out Refinance: What You Need to Know

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A VA cash-out refinance allows military veterans and service members to convert more of their home’s equity to cash than other standard loan programs. Understanding how this U.S. Department of Veterans Affairs (VA) program works will help you decide if it makes financial sense for you.

What is a VA cash-out refinance?

A VA cash-out refinance is a mortgage program that gives military homeowners the ability to borrow more than they owe — up to 90% of their home’s value — and pocket the difference in cash. This is a higher percentage than FHA and conventional cash-out refinances, whose guidelines only allow a maximum 80% loan-to-value (LTV) ratio. Your LTV ratio is a measure of how much of your home’s value is being borrowed.

How does a VA cash-out refinance work?

The moving parts of a VA cash-out refinance are similar to a regular cash-out refinance:

  • You have to qualify based on your income, credit and total debt
  • Your lender will order an appraisal to confirm your home’s value
  • You’ll have to pay off any mortgage balance currently on your home
  • You’ll pay VA closing costs of 2% to 6% of your loan amount

However, there are some important differences that apply only to VA cash-out refinances:

  • You’ll need sufficient VA entitlement. Lenders verify your VA entitlement to confirm you can qualify for the higher loan amount.
  • Your home appraisal must come from a VA-approved appraiser. The VA assigns the appraiser for your VA appraisal, and the cost is typically pricier than what you’d pay for an FHA or conventional appraisal.
  • You may have to pay a funding fee. Unless you’re exempt due to a service-related disability, a VA funding fee of 2.3% to 3.6% is charged and added to your loan amount. This is in addition to regular closing costs.

Should I get a VA cash-out refinance?

You should get a VA cash-out refinance if it will help you accomplish other financial goals, including:

Paying off revolving or high-interest-rate debt. With mortgage rates still at historic lows, you could save hundreds of dollars monthly by replacing revolving credit card balances with a low, fixed-rate mortgage payment.

Making home improvements. If your home needs some repairs, or if it’s time to make some upgrades, a VA cash-out refi gives you more equity to work with. An added bonus: The mortgage interest may be tax-deductible.

Paying for college or trade school. Cash-out funds may help you upgrade your skills or cover college tuition.

Paying off a mortgage that requires mortgage insurance. If you purchased a home with less than a 20% down payment, you’re probably paying mortgage insurance. You can replace a conventional or FHA mortgage with a new VA loan.

Pros and cons of a VA cash-out refinance

ProsCons
You can borrow more of your home’s equity than with FHA or conventional loansYou may pay a funding fee of up to 3.6% of your loan amount
Your interest rate will typically be lower than a conventional loan rateYour appraisal usually costs more than FHA or conventional appraisals
You won’t pay for mortgage insuranceYou may need to wait to refinance if you recently took out a VA loan

VA cash-out refinance guidelines

You’ll need to meet standard minimum mortgage requirements to be approved for a VA cash-out refinance. The information below gives you a quick snapshot of basic VA qualifying guidelines:

  • Credit score. The VA doesn’t publish a guideline minimum, but many lenders set it at 620.
  • DTI ratio. The guideline maximum is 41%, but exceptions are possible with high credit scores and extra residual income.
  • Employment. A two-year stable job history is recommended but there are flexibilities for veterans working new jobs using skills acquired during their military service.
  • LTV maximum. The current maximum is 90%, but some lenders offer cash-out up to 100% of your home’s value.
  • Occupancy. You must live in a home financed with a VA loan.
  • Appraisal. VA appraisals are required on all cash-out refinance transactions and must be ordered through the VA’s online system.
  • Waiting period. At least 210 days must have passed since you took out your current VA loan to be eligible for cash-out refinancing.

Am I eligible for a VA cash-out refinance?

You’re eligible for a cash-out refinance if you meet the minimum service requirements, according to the VA. Your DD Form 214 reflects your military service time, and in most cases, you’re eligible if you’ve served:

  • 90 continuous days of active duty
  • 90 consecutive days during wartime
  • 181 days during peacetime
  • More than six years in the National Guard or Reserve

VA cash-out refinance loan limits

VA loan limits were eliminated for borrowers with full entitlement, effective Jan. 1, 2020. Eligible VA borrowers may be able to get a loan amount above the current conforming loan limit of $647,200 for most parts of the country. An additional perk: If you have enough entitlement you won’t need a down payment.

There are a few limitations, though. Some lenders may set their own loan limits and you’ll still have to meet the minimum VA mortgage requirements for loan approval.

How to get a VA cash-out refinance

There are six standard steps to getting a VA cash-out refinance.

  1. Get your certificate of eligibility. You can get your certificate of eligibility online or by sending a VA Form 26-1880 to your regional VA processing center, along with a copy of your DD Form 214. This document will tell the lender how much entitlement you have for a new loan and how much you’ve used.
  2. Shop for a VA cash-out refinance lender. Besides comparing the loan estimates of at least three to five lenders, be sure to ask them about their experience originating VA loans. Not all lenders make VA loans, and some loan officers may not be familiar with VA loan processing.  In addition, always collect cost estimates on the same day, as interest rates change daily.
  3. Provide financial documents and schedule your appraisal. You’ll need paystubs, W-2s, bank statements and information about your current mortgage, property taxes and homeowners insurance. The lender will order your appraisal through the VA and it will need to be completed within a set time period.
  4. Check your appraisal and review your closing disclosure. Once your VA appraisal comes back, the lender will prepare your closing disclosure at least three days before you sign your closing papers. Discuss any discrepancies from your initial loan estimate and prepare for your closing.
  5. Sign the paperwork and wait three more business days. Refinance transactions always come with an extra three business day “right of rescission” period. You can cancel the refinance in writing by midnight on the third day if you decide the refinance isn’t worth it.
  6. Wait for your wire and then receive your funds. After the cancellation waiting period expires, the funds will be wired to a title or escrow company, and then forwarded to you.

VA cash-out refinance rates vs. standard refinance rates

Conventional and FHA rates tend to be more expensive than VA loan rates. However, the annual percentage rate (APR) may be higher if you’re required to pay the maximum 3.6% funding fee.

VA cash-out refinance vs. VA interest rate reduction refinance loan

Another popular VA refinance program is the VA interest rate reduction refinance loan (IRRRL). Also called a VA streamline, the IRRRL gives homeowners with a VA loan a quick, easy qualifying option to save money, pay off their loan faster or refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan. Key features of the IRRRL include:

  • No appraisal requirement
  • No credit score minimum
  • No income verification

However, you’ll want to skip the VA streamline if you want extra cash: You’re only allowed to roll in closing costs and your VA funding fee.

Alternatives to a VA-cash out refinance

There are some other cash-out refinance programs worth considering.

  • Conventional cash-out refinance. Conventional loans don’t require any mortgage insurance or funding fees, though they do limit you to an 80% LTV. Still, as an added bonus, you can tap equity from a second home or investment property, though the maximum LTV is lower.
  • FHA cash-out refinance. Borrowers with credit scores as low as 500 may be approved to borrow up to 80% of their home’s value with an FHA cash-out refinance. With this loan, though, you’ll pay two types of FHA mortgage insurance, which may make your payment significantly higher than a comparable VA cash-out refinance. 
  • Home equity line of credit (HELOC). A HELOC is like a credit card secured by your home. You’ll only make payments on the balance you charge, and you can pay off and draw funds during a set time called a draw period. After the draw period ends, the balance is paid in monthly installments until it’s paid in full.
  • Home equity loan. A home equity loan is received in a lump sum and paid back in fixed installments, usually in five to 30 years. It may be a good option if you want to leave your first mortgage alone but want the predictability of a fixed monthly payment.
 

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