Can I Get a VA Home Equity Loan with a VA Mortgage?
If you have a VA loan and are wondering how to get equity out of your home, you’re in luck: you can use a home equity loan, home equity line of credit (HELOC) or VA cash-out refinance. All of these options will put cash in your pocket that you can use for anything you choose.
There’s no such thing as an official VA home equity loan, though. The U.S. Department of Veterans Affairs (VA) backs cash-out refinances, but not other home equity products.
How does a home equity loan work?
A home equity loan is one of the most common ways to borrow against your home equity.
You’ll receive a cash lump sum up front and pay back the loan over time, typically at a fixed interest rate. Your home secures the loan, so if you don’t make your monthly payments you could lose your property to foreclosure.
Why aren’t there VA home equity loans?
Home equity loans are sometimes called second mortgages because they’re second in line to be repaid in a foreclosure sale. This means that if your home is ever sold to repay your debt, your original mortgage lender will be paid back first. Any money leftover would go to the home equity loan lender but, if there’s no money left, that lender would get nothing. This makes second mortgages risky for lenders and is likely why the VA doesn’t guarantee any.
Home equity is the difference between how much you owe on your home and how much it’s worth. You build equity as you repay the mortgage you used to purchase your house. If you don’t know how much equity you have, read our guide on how to calculate your home equity.
How much equity can I borrow from my home?
You’re typically limited to borrowing 85% of your home’s value, but the amount you qualify to borrow also depends on your loan-to-value (LTV) ratio. Lenders set a maximum LTV ratio to cap how much you can borrow, and they express that limit as a portion of your home’s market value.
Some lenders may also combine the LTV ratios from both your first mortgage and the home equity loan into a single “combined” loan-to-value (CLTV) ratio. For example, if you owed $250,000 on a $450,000 house, your LTV would be around 56%. But if you then wanted to take out a home equity loan worth $15,000, your CLTV would be about 59%.
Interest rates and home equity closing costs vary by lender, so you should shop around for the best home equity loan rates available.
How to qualify for a home equity loan
In addition to the factors mentioned above, lenders will also typically look at your income, 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 and bank statements.
You must have at least a 620 credit score, but some lenders require a 660 to 680 credit score or better to qualify for a home equity loan. The better your credit score, the lower your interest rate tends to be.
The good news is that no matter what interest rate you end up with, you may be able to deduct the interest paid on a home equity loan from your federal taxes. Interest can be deducted when used to “buy, build or substantially improve” the home securing the loan.
Home equity loan pros and cons
| Pros | Cons |
|---|---|
Fixed interest rates. Your monthly payments are predictable when rates are fixed. Flexibility. There are no limits on how you can spend the money. Tax benefits. Interest payments on a home equity loan may be tax-deductible. | Closing costs. Expect to pay from 2% to 5% of the loan amount in closing costs. Collateral. Using your home as collateral can lead to foreclosure if you miss payments. Credit requirements. You may need a higher credit score to qualify compared to a conventional first mortgage. |
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a revolving line of credit, similar to a credit card. Instead of receiving a lump sum of cash up front, HELOC borrowers can make multiple purchases — as many as they’d like — up to a credit limit. You can usually borrow up to 85% of your home equity, just like with a home equity loan.
You’ll have a specific window of time, called a draw period, in which to spend your money. This typically lasts anywhere from two to 20 years. You’ll then enter the repayment period, which often lasts 20 to 30 years.
HELOCs typically come with variable interest rates, but fixed-rate offerings may be available. The interest rate on variable-rate HELOCs will adjust with the broader market, but come with an interest rate ceiling that limits how high it can adjust.
What to look for when shopping for a HELOC
As you shop for a HELOC, pay close attention to:
1. Rates and terms
The rate you’re offered can dramatically affect your monthly payments. In some cases, lenders may offer a low introductory rate, but it will reset when the loan enters the repayment period.
2. Upfront costs
You may have upfront costs like appraisal, document prep and title insurance fees.
3. Additional fees
Lenders may charge an array of fees over the life of the loan. These often include:
- Annual participation fees
- Transaction charges
- Inactivity fees
- Cancellation fees
Remember: There’s no official VA HELOC offered by the U.S. Department of Veterans Affairs. However, both military and civilian lenders offer HELOCs.How to qualify for a HELOC
HELOC lenders will take a look at your full credit profile when deciding whether to issue you a credit line and what interest rate to charge you. Many lenders require at least a 680 credit score to qualify for a HELOC, though there are several who only require a 620.
Your lender will also evaluate your outstanding debt, including current payments on your VA mortgage, auto loans, 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 may balk at DTI ratios above 43%.
As with home equity loans, the better your credit, the less you tend to pay in interest.
HELOC pros and cons
| Pros | Cons |
|---|---|
Long draw periods, up to 10 years or more. You only pay interest on the amount you spend. Lower upfront costs compared to home equity loans. | Rising payments. Variable interest rates mean payments can increase significantly. Limited flexibility. Many HELOCs require an initial draw and minimum total draw amount. Rates tied to the market. Recent inflation and rising interest rates make a variable-rate loan more risky. |
VA cash-out refinance
As mentioned above, the VA doesn’t back second mortgages like home equity loans or HELOCs. However, there is an official, VA-backed program that can help you borrow from the equity in your property: the VA cash-out refinance loan.
A VA cash-out refinance allows you to take out a new VA loan for an amount larger than what you currently owe on your home. The new loan amount pays off your original mortgage, allows you to pocket the cash difference and is based on your home’s appraised value. The VA will guarantee cash-out refinance loans for up to a 90% LTV ratio.
Can I finance the closing costs on a VA cash-out refinance?
Many veterans must pay a one-time 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 new loan amount. However, other closing costs on your VA cash-out refinance can’t be rolled 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. If you don’t have the original, you can apply for a new COE online. You must also 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 purchase mortgage. The lender may want to see two years of federal income tax returns and W-2s to determine your ability to repay the new mortgage. Veterans with full VA entitlement have no loan limits.
See current VA mortgage and refinance rates today.
VA cash-out refinances come with fewer protections
Cash-out refinances are exempt from certain rules that apply to most other VA loans. These rules — set forth in the Economic Growth, Regulatory Relief and Consumer Protection Act — are intended to protect veterans from predatory lenders. That doesn’t mean that VA cash-out refinances are a bad idea, but it does mean that you should be cautious. Make sure you understand your loan terms and have a solid plan for repayment.
VA cash-out refinance pros and cons
| Pros | Cons |
|---|---|
More borrowing power. The VA’s program allows borrowers to access more equity than most other cash-out refi programs. Fixed interest rates. Your monthly payments are stable over the loan term. Limited fees. The VA imposes a cap on lender fees. No mortgage insurance is required. Flexibility with closing costs. You can get by with less cash up front if you roll some closing costs into your loan. | Reduced equity. Adding to your mortgage debt extends the time it takes to own your home outright. Unique fees. You may need to pay a VA funding fee up to 3.6% of your loan amount. Not available everywhere. Homeowners in Texas may not be able to use the program due to state law. |
Interest rates compared: HELOC vs. home equity loan vs. cash-out refinance
Once you understand how the different loan types work, your decision may hinge on the interest rates offered. Here’s a quick overview of how the interest rates for these three loan types stack up.
| Home equity loan | HELOC | Cash-out refinance | |
|---|---|---|---|
| Fixed or variable rates? | Fixed | Variable | Fixed |
| Rate competitiveness | $$$ | $$ | $ |
| Higher rates than HELOCs and cash-out refinances | Higher rates than cash-out refinances;lower rates than home equity loans | Lower rates than HELOCs and home equity loans |
Alternative option: A personal loan
If you need a smaller loan amount or don’t wish to use your home as collateral, a personal loan may suit you better than a loan that taps your home equity. A common alternative for veterans needing an infusion of cash could be an unsecured personal loan, also known as a signature loan.
Some lenders, especially military lenders like Navy Federal Credit Union and PenFed Credit Union, advertise low-interest personal loans with more flexible or advantageous terms for veterans.
Personal loan pros and cons
| Pros | Cons |
|---|---|
No collateral. Your property isn't used as collateral. Quick turnaround. Borrowers often receive their money in as little as one to five business days. Flexible loan amounts. Personal loan amounts can range from a few hundred dollars up to $100,000. | Origination fees. These fees can cost you anywhere between 1% and 12%. Higher rates. Interest rates usually run higher than those on VA loans. Short loan terms. Repayment terms are often shorter than home equity products. |
The loan amount and APR offered on personal loans can vary by quite a bit, depending on the borrower’s credit score. Check out the chart below to get a ballpark idea of what interest rate you might be able to qualify for. It shows the average APRs offered for a personal loan on the LendingTree platform in the fourth quarter of 2023.
| Credit score range | Average APR | Average loan amount |
|---|---|---|
| 720+ | 16.01% | $18,594 |
| 680-719 | 25.78% | $15,302 |
| 660-679 | 37.57% | $11,160 |
| 640-659 | 51.61% | $8,088 |
| 620-639 | 71.55% | $6,300 |
| 580-619 | 112.28% | $4,397 |
| 560-579 | 152.35% | $3,071 |
| Less than 560 | 175.16% | $2,405 |
Shop for personal loans today.Frequently asked questions
Many lenders require a 680 credit score 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 or visit your local bank or credit union to get quotes.
A cash-out refinance with bad credit may be easier to find than a home equity loan, as there are many available options, including government-backed programs. 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.
If you’ve received a letter in the mail urging you to use your equity reserves before they expire, throw it away. In the world of mortgages, “equity reserves” is just another term for “equity,” but your home equity — or ownership stake in your home — never expires.
Many scammers and opportunists use this tactic to pressure homeowners into refinancing, even when that refinance isn’t in their best interest. Always take the time to compare offers before making your final decision, and research each lender’s reputation. It’s easy to compare refinance lenders and rates online and save thousands in the process.
Yes, a VA cash-out refinance can help you convert a non-VA mortgage into a VA loan. As long as you meet the requirements for a VA cash-out refinance, you can use the loan to pay off your current mortgage — it doesn’t matter whether that loan is a conventional loan, VA loan or other government-backed loan.