VA Cash-Out Refinance: What You Need To Know
A VA cash-out refinance replaces an existing mortgage with a new home loan backed by the U.S. Department of Veterans Affairs (VA). The terminology can feel a little confusing because you can use the VA cash-out refinance program to withdraw equity, refinance a non-VA mortgage into a VA loan or obtain different loan terms — even when you receive no cash at closing.
Borrowers typically use this program to tap into their home’s equity to fund renovations, debt consolidation or other large expenses. Or, if they don’t need to convert any equity to cash, simply to refinance into a loan with better terms.
It’s important to understand how VA cash-out refinancing works, as well as the eligibility requirements and alternatives, before deciding if it’s the right option for you.
- If you currently have a VA loan, you can apply for a VA cash-out refinance to convert a portion of your home’s equity into cash. You can also refinance just to stabilize or lower your mortgage payments.
- Conventional or FHA loan mortgage-holders may choose a VA cash-out refinance to convert their non-VA mortgage into a VA loan — as long as they don’t need to receive any cash back.
- You can typically borrow up to 90% of your home’s value (plus eligible fees).
How does a VA cash-out refinance work?
The VA cash-out refinance program allows eligible borrowers to tap up to 90% of their home’s value (plus the VA funding fee) — that’s more than FHA and conventional cash-out refinances, whose guidelines allow only a maximum 80% loan-to-value (LTV) ratio.
However, you don’t necessarily have to use this VA program to access cash; in some cases, you may just want to use it to improve your loan terms and/or cover the refinancing costs associated with doing so. We’ll go over how these two distinct types of VA cash-out refinance loans differ below.
Like all mortgage interest rates, VA loan rates fluctuate daily based on market conditions. Your credit score, income and overall debt burden also affect the rate you get.
Since VA mortgages are government-backed loans, rates are typically lower than conventional loans.
Types of VA cash-out refinances
| Type 1 “Rate and term” cash-out refinance | Type 2 “True” cash-out refinance |
|
|---|---|---|
| Purpose |
| Convert home equity into funds that can be used for debt consolidation, home improvement or other large expenses |
| Cash to borrower | None |
|
| Loan amount | Equal to or less than the amount of the mortgage it will pay off | Greater than the amount of the mortgage it will pay off |
| Recoupment requirement |
| None |
Who is eligible for a VA cash-out refinance?
Active-duty service members, veterans and qualifying spouses may qualify for a VA cash-out refinance. The main thing you’ll need is a certificate of eligibility (COE) from the VA. This document confirms that you meet the minimum requirements to qualify for a VA home loan. You can request a COE through the VA.
In addition to the COE, you’ll also need to meet the lender’s refinance requirements to qualify for a loan. Three of the biggest factors lenders consider when determining whether to give you a mortgage include:
-
Debt-to-income ratio (DTI): 41% maximum
Your DTI ratio measures how much of your monthly income is tied up in debt. It’s one of the most common tools lenders use to determine whether you can afford the loan’s monthly payments. Although 41% isn’t a hard limit, it’s a common cutoff and higher ratios may receive enhanced scrutiny. -
Credit score: 550 to 620 minimum
While there’s no minimum set by the VA, most lenders set their minimum score between 550 and 620. Lenders will also analyze your credit report, particularly your payment history and account balances, to get a clear picture of your financial situation.
Don’t know your credit score? Get your free score on the LendingTree app today.
How much does it cost to do a VA cash-out refinance loan?
There are closing costs involved with a VA cash-out refinance. One of the biggest expenses is the VA funding fee — which is between 2.15% to 3.30% of the loan amount, depending on whether you’ve had a VA loan before. The VA also requires a professional appraisal to ensure your home meets its requirements. The fees for a VA appraisal depend on your location and property type.
However, there are some fees VA borrowers don’t have to pay — these are known as non-allowable fees, and they include attorney and real estate agent charges.
You may not need to pay the VA funding fee for a cash-out refinance in certain situations, including if:
- You’re currently receiving or are eligible to receive VA compensation due to a service-related disability
- You’re a surviving spouse of a veteran receiving Dependency and Indemnity Compensation (DIC)
- You’ve received the Purple Heart
VA cash-out refinance pros and cons
Pros
- May provide access to equity. A Type 2 refinance may provide cash for home improvements, debt consolidation or other lender-approved purposes.
- Can convert a non-VA mortgage into a VA loan. This may eliminate mortgage insurance or improve the rate, payment, term or mortgage type.
- Competitive interest rates. VA cash-out refinances tend to have slightly lower rates than conventional cash-out refinance loans.
- Type 1 can refinance without withdrawing equity. A borrower can move into a new VA loan even when the new loan doesn’t exceed the existing payoff.
Cons
- Closing costs can be significant. These may include the VA funding fee, appraisal and lender fees.
- May reduce your home equity. Borrowing above the existing payoff leaves you with a larger mortgage balance and less available equity.
- Monthly payment or lifetime interest may rise. A larger balance or longer repayment term can increase the overall cost of your mortgage.
- Requires full qualification and an appraisal. Unlike an IRRRL, the cash-out program is not a streamlined refinance.
- The home is collateral. If you’re taking out cash, especially to pay off other debts, keep in mind that this means tying that debt to your home. This puts your home at increased risk, as failure to repay can lead to foreclosure.
How to get a VA cash-out refinance loan
1. Compare VA lenders
Start by getting loan estimates from a few different lenders to compare rates and terms. For the most accurate comparison, aim to request estimates on the same business day. Since rates fluctuate daily, requesting estimates close together helps ensure you’re comparing apples to apples.
Searching for lenders? Check out our list of the best refinance lenders.
2. Submit your application
Once you’ve found a lender, it’s time to apply for the loan. This step involves handing over various documents to your lender, including your certificate of eligibility, pay stubs, tax returns and bank statements.
3. Close on the loan
As with any mortgage loan, you’ll need to go through a closing process for your VA cash-out refinance. During this time, you’ll need to provide any additional information requested by your lender, complete the appraisal and pay the closing costs.
VA cash-out refinance vs. IRRRL (streamline refinance): Which should I choose?
If you already have a VA loan, you may be wondering whether your best bet is a VA cash-out refinance or a VA interest rate reduction refinance loan (IRRRL). The simplest way to think of these two loan types is as follows: an IRRRL is a streamlined path for improving an existing VA loan. A VA cash-out refinance — even a Type 1 with no cash back — is a new, fully underwritten VA refinance.
The most important differences are:
| VA IRRRL | VA cash-out refinance (of an existing VA loan) | |
|---|---|---|
| Main purpose | Lower the interest rate and/or monthly payment, or move from an adjustable rate to a fixed rate | Taking equity out or changing the loan term or type |
| Cash to borrower | None | Type 2 may provide cash; Type 1 generally does not |
| Loan limit | No hard limit, though lenders may set their own limits | 100% of the payoff amount of the loan being refinanced |
| Occupancy | Borrower may certify that they currently live in or previously lived in the property | Borrower must intend to occupy the property as a primary residence within 60 days to 12 months |
| Credit/income requirements | None | Must meet the standard VA credit, income, debt and income requirements |
| Appraisal | Generally not required | VA-approved appraisal required |
| Funding fee | 0.50% of the loan amount | 2.15% to 3.30% of the loan amount |
| Best if … |
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Alternatives to a VA cash-out refinance
- Conventional cash-out refinance. Conventional loans don’t require any mortgage insurance or funding fees, though they do limit you to an 80% LTV ratio. You can tap equity from a second home or investment property, too.
- 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, 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 make payments only on the balance you charge, and can draw funds during a set time called a draw period. After the draw period ends, you’ll pay off the balance 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 within five to 30 years. It may be a good option if you want to leave your first mortgage alone but still desire the predictability of a fixed monthly payment.
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