VA Cash-Out Refinancing
Are you looking to trade home equity for cash? A VA cash-out refinance allows you to tap into the equity available in your home and convert any home loan into a VA mortgage with low rates and no mortgage insurance.
Essentially, you replace your current mortgage with a higher VA loan and get the cash difference at closing. Say you’re an eligible homeowner whose property has a current market value of $300,000 and your existing loan balance is $150,000. With a VA cash-out refinance, you can receive a new mortgage of up to $300,000 and receive $150,000 cashback at closing, minus closing costs.
Let’s detail how a VA loan works and the benefits of getting one.
Who’s Eligible for A VA Cash-Out Refinance?
A VA cash-out refinance allows you to refinance a VA or non-VA loan into a VA-backed loan. To qualify for a VA cash-out refinance, you first need to have built a reasonable amount of home equity. You must also certify occupancy for the property.
If you're currently on active duty or have been honorably discharged, your service to your country doesn’t go unrecognized. The VA cash-out refinance offers exceptional benefits allowing you to get a cash back from your home equity to pay off debt, make home improvements, invest in real estate, or any other purpose.
Persons who are eligible for a VA cash-out refinance include:
- Active duty service members
- Reserve and National Guard members (called to active duty)
- Current Reserve and Guard members who’ve served six years of creditable service
- Qualified surviving spouses
How Does a VA Cash-Out Refinance Work?
A VA cash-out refinance allows you to finance up to 100 percent of your home’s value. The amount of money you get will depend on your maximum loan-to-value ratio (LTV), which is the ratio of your current principal balance compared against the value of your home.
Using the previous example, if your home is worth $300,000 and you have a loan balance of $150,000, then your loan-to-value ratio is 50 percent (That is, $150,000 ÷ $300,000). The VA cash-out loan allows you to access up to 100 percent of your LTV. However, some lenders will only go up to 90 percent.
A VA cash-out refinance is a great tool that can help cover large expenses such as college tuition. Another advantage is that it can be used to consolidate higher-interest debts.
For instance, you can use the cash back from refinancing to pay off credit card debts that typically have higher interest rates. Plus, you might be able to lower your current mortgage’s interest rate, depending on current rates.
Keep in mind that VA cash-out interest rates tend to be a little higher than the standard VA loan rates. However, your own refinance rate depends on several factors, including your credit score and the amount of home equity which can come together to get you a great cash-out refinance deal.
Considering all these benefits, how do you go about applying for VA cash-out refinancing?
How Can You Get A VA-Backed Cash-Out Refinance Loan?
The process of applying for a VA cash-out refinance is pretty similar to any VA-backed loan. The loans aren't provided by the Department of Veterans Affairs but rather through several approved mortgage lenders. So, you'll have to meet the requirements of both. Here’s the process.
1. Get a Certificate of Eligibility (COE)
You must have sufficient military history to qualify for any VA –backed loan. A COE verifies that you meet the service requirements needed to qualify for a VA loan. You can apply online for your COE or through your VA regional loan center.
2. Find a Lender
Individual lenders have their own guidelines to evaluate you as the borrower. Be prepared to provide an in-depth portrait of your personal finances. Typical requirements include:
- A credit score of at least 580 (varies by lender)
- Stable income
- A debt-to-income ratio under 41 percent (also varies by lender)
- Sufficient home equity
Some lenders will require you to provide your W-2 statements and tax returns dating back two years.
3. Get An Appraisal
The lender will order an expert assessment of your home’s value as this informs how much cash you receive back when you refinance.
On this point, you cannot refinance a loan for a property that's not your primary abode, such as an investment property or vacation home - you'll need to explore other options for these assets.
4. Cover the Closing Costs
Compare several lenders to get a sense of how much you’ll need in closing costs. In addition to closing costs, you’ll have to pay a VA funding charge during closing since the VA home loan program doesn’t require down payments or monthly mortgage insurance.
If you’ve never accessed a VA-backed loan, the VA funding fee will be 2.3 percent of the loan principal and 3.6 percent if you have used the VA benefit before.
Should You Cash Out?
Before cashing out, it's important to compare the current VA refinance rates to your existing loan to determine if it's the best option for you. All in all, if you have US military experience, it’s worth checking your eligibility for a VA cash-out refinance. It can help you save money.