VA Cash-Out Refinancing: What it is and How it Works

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If you’re a military member, veteran, or surviving spouse, one of the great benefits you can capitalize on is the borrower-friendly VA home loan. If you currently have one, or even if you have a non-VA mortgage, but want to cash out some home equity while resetting your rate and term, you may qualify for a VA cash-out refinance.

Read on for details on how a VA cash-out refinance works, who is eligible, the steps required, and alternative options to consider.

VA cash-out refinancing explained

A VA-backed cash-out refi works just like any cash-out refinance: It allows you to replace your existing mortgage loan with a new one while pocketing money at closing.

You’ll be starting over with a fresh home loan that can be longer or shorter than your current term and with an all-new fixed rate that’s hopefully lower than your existing rate.

“A VA cash-out refinance allows you to tap into your home’s equity and pull out cash with the convenience of a refinance attached, provided that you’ve earned enough equity in your property and different requirements are met,” explains Jason Gelios a Realtor in southeast Michigan who specializes in loans for veterans. “These types of loans are backed by the Department of Veterans Affairs, making them less risky to lenders.”

One nice feature of a VA cash-out refinance is that you can borrow more than you owe on your existing mortgage: often a maximum of 90% of your property’s value, with the difference being the cash-out portion you pocket.

As an added benefit, your existing mortgage doesn’t even have to be a VA home loan. You can refinance your current VA home loan or a conventional or FHA loan and replace it with a new VA cash-out refi loan.

And you are allowed to borrow up to the Fannie Mae/Freddie Mac conforming loan limit in most areas – even higher in some high-cost counties (the 2024 conforming loan limit for single-family residences is $766,550 in most areas). You aren’t required to make a down payment with a VA cash-out refinance loan, but if you want to put some money down, you can even borrow more than the conforming loan limit.

Good candidates for a VA cash-out refi

There are plenty of good reasons to consider pursuing a VA cash-out refinance. Perhaps you need to liquidate home equity to pay for home improvements, tuition, medical expenses, or another important expense. Or maybe you want to pay down higher-interest outstanding debt.

“Let’s say you currently pay $2,500 monthly on your conventional mortgage loan and about $1,000 a month on high-interest credit card debt,” says Gelios. “You apply and get approved for a VA cash-out refinance loan and pull out cash from your equity to pay off that high credit card debt. You will increase your mortgage payment to $2,800 – an extra $300 a month – but you will actually save $700 a month otherwise spent on those credit cards.”

Or, assume you have your eye on a rental property you want to purchase, a goal that tapping your equity could accomplish. 

“Imagine you’re a veteran who purchased a $300,000 home that’s now worth $450,000,” says real estate agent Alex Capozzolo, co-founder of SD House Guys in San Diego. “By refinancing from a 3.5% fixed interest rate to a new 5% fixed rate VA cash-out refinance loan, you could pull $65,000 in cash out, creating a new monthly loan payment increase of only $150. You’ll have to pay closing costs of, assume in this instance, $15,000, but you can roll those closing costs into your new loan. Then, you can use the $65,000 as a down payment on that rental property.”

However, using your home’s equity to finance things like a major vacation, new car, or monthly expenses should be avoided because it’s not the smartest use of this type of money and program, Gelios cautions.

Of course, you need to have earned sufficient equity in your home to qualify (more on that next) and to make this option worth it. 

Requirements to qualify

First, you need to be an active duty military member, veteran, or surviving spouse to qualify for a VA cash-out refinance loan. You’ll also need to present a Certificate of Eligibility (COE) to the lender as evidence that you qualify for this new loan.

Furthermore, the home you are refinancing must be the primary residence you will continue to occupy. 

“Additionally, you have to qualify for the lender’s specific guidelines when it comes to debt-to-income ratio (DTI); the maximum DTI allowed is usually 41%,” continues Gelios. “Also, usually, you must have a minimum credit score of 580 to 620, provide full proof of income, and pay a VA funding fee, which can range from 2.15% to 3.3% of your loan amount.”

You also need to have earned at least 10% equity in your home to be eligible. Again, remember that most lenders will only lend up to 90% of your home’s appraised value, although some lenders will go higher.

The steps involved

Getting a VA cash-out refinance loan is similar to the process involved when you got your existing mortgage loan. Prepare to:

  • Wait at least six months from the date your current mortgage payments began.
  • Shop around for different lenders who offer a VA cash-out refi loan and compare loan offers and rates carefully. Many private banks, mortgage companies, and credit unions offer VA-backed cash-out refi loans.
  • Apply for the new loan.
  • Present necessary documentation, including your COE, copies of paycheck stubs from your most recent 30-day period, W-2 forms for the previous two years, a copy of your federal income tax returns from the previous two years, and any other information or paperwork your lender requires.
  • Prepare to have your home appraised and pay for this appraisal, which your lender will likely require.
  • Await an underwriting decision.
  • If approved, close on the loan and pay closing costs, which typically range from 2% to 5% or more of your loan amount.
  • Receive your cash out lump sum after a mandatory three-day waiting period following the day of closing.

Alternatives to consider

Just because you qualify for a VA cash-out refinance as a military member, veteran, or surviving spouse doesn’t mean this is your best financial option. Instead, you might want to ponder a refinance to a new conventional loan.

Here, you’ll still have to pay closing costs and will be required to make a minimum down payment, but you can avoid paying the VA funding fee. 

“Or, you can explore a home equity loan or home equity line of credit (HELOC),” adds Capozzolo, “either of which may be easier to qualify for and close on, depending on your circumstances.”

Having trouble qualifying for any of these options? You could pursue a secured or unsecured personal loan or apply for one or more credit cards to help you pay your bills, although these choices almost certainly will charge higher interest than a cash-out refi loan, home equity loan, or HELOC. 

The bottom line

A VA cash-out refinance, coupled with your home’s equity, can be a valuable tool that empowers you to fulfill important financial goals. Just remember to head into this commitment carefully after weighing the pros, cons, and costs thoroughly.

“Make sure that any money you are pulling from your home will be used for good purposes that put you in a better financial position,” says Gelios.

Dan Rafter

Dan Rafter has covered real estate, mortgage and personal-finance news for more than 15 years, writing for the Chicago Tribune, Washington Post, Consumers Digest and many others. A graduate of the University Illinois with a degree in journalism, he is editor of Midwest Real Estate News magazine and blogs on commercial real estate for that publication at rejblog.com, in addition to being a contributor for Refi.com.

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