VA Loans: How They Work and Qualifications for 2022
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I Have a VA Mortgage. Can I Get a Home Equity Loan?

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If you’re wondering whether you can get a home equity loan or line of credit with a VA mortgage, the short answer is yes. You can borrow against your home equity to free up cash. But keep in mind: There is no such thing as an official VA home equity loan.

Unlike your VA mortgage, a home equity loan won’t be guaranteed by the U.S. Department of Veterans Affairs. If you have a VA mortgage and are looking for ways to tap into home equity, you have several options.

Home equity loan

Home equity loans are often called second mortgages. You receive a lump sum of cash upfront and pay back the loan over time, typically at a fixed interest rate. Your home secures the debt. If you don’t make your monthly payments, you could lose your property.

You’re typically limited to 85% of the equity you have in the property, but the amount you’re able to borrow depends on:

    • Your income
    • Your credit
  • The market value of your home

Equity is the difference between how much you owe on the home and how much it’s worth.

One of the advantages of a home equity loan is that you may be able to deduct the interest paid on a home equity loan from your federal taxes depending on how you use your home equity loan proceeds. Interest can be deducted when used to buy, build or substantially improve the home securing the loan.

Interest rates and closing costs (typically between 2% and 5% of the loan amount) vary by lender, so you should shop around for your best rates available. You should also pay attention to additional costs, which can include:

  • Application or loan processing fees
  • Origination fees
  • Broker fees
  • Appraisal fees
  • Lender or funding fees
  • Document fees

In many cases, you can roll closing costs into the loan so that you don’t need to pay them out of pocket.

How to qualify for a home equity loan

In addition to the factors mentioned above, lenders will also typically look at your expenses and debt when considering you for a home equity loan and setting your interest rate. Prepare to show your tax returns, proof of employment, bank statements and your home insurance policy.

You must have a credit score of at least 620, but many lenders require a credit score of 660 or 680 or better to qualify for a home equity loan. The better your credit score, the lower your interest rate tends to be. This can have a major impact on your monthly payment.

The following myFiCO chart shows the national APRs offered on 10-year home equity loans for $50,000, broken down by credit score:

Credit Score APR Monthly Payment
740+ 4.849% $527
720-739 5.224% $536
700-719 6.474% $567
670-699 7.849% $603
640-669 9.349% $643
620-639 10.849% $684
Figures accurate as of April 7, 2020

Home equity loan pros and cons

Pros Cons
 No restrictions on how to spend money Closing fees may be higher than other options, including home equity lines of credit
Interest payments may be tax deductible Using home as collateral can be risky, can lead to foreclosure if payments are missed
Fixed interest rates make monthly payments predictable

Home equity line of credit

A home equity line of credit, commonly known as a HELOC, is a revolving line of credit, similar to a credit card. Instead of receiving a lump sum of cash upfront, HELOC borrowers are sent checks or a HELOC credit card to use to make purchases and pay bills, up to a credit limit.

You may have a specific window of time, called a draw period, in which to spend your money. This typically lasts 10 years or more. Then you enter the repayment period, often 10 or 15 years. You can borrow up to as much as 85% of your home equity, just like with a home equity loan.

HELOCs typically come with variable interest rates, but fixed-rate offerings may be available. The interest rate you pay will adjust with the market, but variable-rate HELOCs often come with an interest rate cap. As you shop for a HELOC, pay close attention to the rates and terms offered, including whether there’s a low introductory rate that will reset and affect the size of your monthly payments. Also watch out for upfront costs, which often include:

  • Application fees
  • Appraisal fees
  • Attorney fees
  • Title search fees

Other fees can be charged over the life of the loan. These often include:

  • Annual participation fees
  • Transaction charges
  • Inactivity fees
  • Cancellation fees

How to qualify for a HELOC

HELOC lenders will take a look at your full credit profile when deciding whether to issue you a loan and what interest rate to charge you. Some lenders require a credit score of at least 680 to qualify for a HELOC, with credit scores between 620 and 680 being handled case by case. There are some poor-credit HELOCs available for applicants who hold considerable equity.

Your lender will also evaluate your outstanding debt, including current payments on your VA mortgage, car, credit cards and student loans, as well as any child support you may be paying. Your total monthly debt payments divided by your earnings makes up your debt-to-income (DTI) ratio. Although there are exceptions, many lenders balk at DTI ratios above 43%.

The better your credit, the less you tend to pay in interest. This chart, also from myFICO, shows the national average APRs offered on HELOCs for $50,000, broken down by credit score:

Credit Score APRs Monthly Payment
740+ 4.849% $264
720-739 5.224% $275
700-719 6.474% $315
670-699 7.849% $362
640-669 9.349% $415
620-639 10.849% $470
Figures accurate as of April 7, 2020

HELOC pros and cons

Pros Cons
 Long draw periods, up to 10 years or more Interest payments begin first draw
Only pay interest on amount you spend Variable interest rates mean payments can go up significantly
Lower upfront costs compared with home equity loans Many HELOCs require initial draw and minimum total draw amount, reducing flexibility

VA cash-out refinance

While there is no official VA home equity loan, there is a VA-backed program that can help you access cash through the equity in your property: the VA cash-out refinance loan.

This loan allows you to take out a new VA mortgage for a larger amount than you currently owe, providing the difference in cash. If you qualify, you can also convert a non-VA mortgage into a federally backed VA loan. The VA will guarantee cash-out refinancing loans up to 90% of your home value. The cash-out loan pays off the outstanding debt on your original mortgage, and the new loan amount is based on the appraised value of your home.

Many veterans must pay a funding fee when taking out a VA loan. This fee can be 2.3% or 3.6% of the loan amount, depending on how many times you’ve used the VA loan benefit. This can be financed into your loan amount. However, other closing costs on your VA cash-out refinance can’t be financed into your loan.

How to qualify for a VA cash-out refinance

When you were first approved for a VA loan, you should have received a Certificate of Eligibility (COE) that verifies you qualify for VA home loan benefits. You’ll need your original COE for your refinance, or you’ll need to apply for a new COE if you don’t have one. You also must live in the home that is being refinanced.

There is no minimum credit score required, but the VA requires lenders to evaluate income and monthly debts to determine if borrowers can make monthly payments.

The application process is similar to the one the VA uses on a new purchase mortgage. The lender may want to see two years of federal income tax returns and two years of W-2s to determine your ability to repay the new mortgage. Starting in 2020, loan limits no longer applied to veterans with their full home loan entitlement benefits.

VA cash-out refinance pros and cons

Pros Cons
 Able to access more equity than most other loan programs Adding to debt can extend time it takes to own home outright
Many offer fixed interest rates, meaning interest rates and monthly payments are stable over term of loan May need to pay VA funding fee
Homeowners in Texas not likely able to use program due to state law

Alternative option: Personal loan

One common alternative for veterans looking for an infusion of cash could be an unsecured personal loan. You may need a smaller amount of money or don’t wish to use your home as collateral.

In that case, you may consider a personal loan, also known as a signature loan. Some lenders advertise low-interest personal loans for veterans.

Pros Cons
 Property not used as collateral Origination fees (generally between 1% and 6%) that could be deducted from total amount
Ability to borrow as little as $1,000 or as much as $100,000 depending on credit history Interest rates usually run higher than those on VA loans
Quick turnaround, often receiving money in as little as 1 or 2 business days

The loan amount and APR offered on personal loans tend to differ based on the borrower’s credit score. The following chart shows average best APR loan amounts and APRs offered on the LendingTree platform in March 2020:

Credit Score Average Loan Amount Average APR
760+ $23,667 9.96%
720-759 $19,852 12.77%
680-719 $14,393 18.28%
640-679 $11,488 24.25%

If you’re looking into personal loans, be sure to shop around for your best rate and look for hidden fees and prepayment penalties.

FAQ: Equity, home equity loans, cash-out refinancing

If I’m taking equity out of my home, what’s my best option?

If you’re a military veteran taking equity out of your home, a VA cash-out refinance could often be your best choice. VA cash-out refinances allow you to access up to 90% of the equity in your home, when most other equity loans limit you to 85%. The federal government’s guarantee also speeds approval and keeps interest rates reasonable.

Where can I find bad-credit home equity loan lenders?

Many lenders require a credit score of 680 or higher, but it’s still possible to find bad-credit home equity loan lenders. You’ll need to have a significant amount of equity in your home and little other debt. Try an online lender comparison site, such as LendingTree, or visit your local bank or credit union.

Can I get a cash-out refinance with bad credit?

A cash-out refinance with bad credit may be easier to find than a home equity loan. Start with your current lender and see what your options might be. And if you’re a veteran, look into a VA cash-out refinance. The VA program doesn’t have a minimum credit score requirement.


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