Are you a veteran, active-duty service member, or an eligible surviving spouse looking for ways to tap into your home equity? A VA cash-out refinance could be a powerful financial tool that puts cash in your pocket while potentially improving your loan terms. In this guide, we’ll break down everything you need to know about VA cash-out refinancing, from the basics to eligibility requirements and frequently asked questions.
What is a VA Cash-Out Refinance?
Simply put, a VA cash-out refinance replaces your existing mortgage (whether it’s a VA loan or a conventional one) with a new VA-backed loan, allowing you to extract a portion of your home’s equity as cash. This cash can be used for a wide range of purposes:
- Home improvements: Fund renovations or repairs to increase your property’s value and comfort.
- Debt consolidation: Pay off high-interest credit cards or other loans.
- Major expenses: Cover costs like education, medical bills, or a dream vacation.
- Investment opportunities: Use the funds to generate additional income streams.
VA cash-out refinances offer eligible borrowers numerous perks compared to traditional cash-out refinances. These benefits include lower interest rates, more flexible credit and income requirements, the elimination of private mortgage insurance (PMI), and a VA funding fee that may be waived under certain circumstances.
Cash-out VA loans also allow you to borrow up to 100% of the value of your property, making them the most competitive cash-out mortgage option available! Most other types of cash-out mortgages restrict borrowing limits to 75% of the value of your property.
How Does a VA Cash-Out Refinance Work?
Because the federal government backs VA loans, lenders view them as less risky investments. This allows eligible borrowers to secure significantly better loan terms compared to traditional financing options. A prime example is the lower interest rates typically found on VA cash-out refinances.
Here’s a simplified breakdown of the cash-out refinance process:
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Appraisal: A crucial part of the process is having a VA-approved appraiser assess your home’s current fair market value. This is the most accurate way to determine the amount you can borrow.
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Equity Calculation: Your equity is the cornerstone of most refinances. It’s calculated by subtracting your outstanding mortgage balance from your home’s appraised value. But for cash-out VA loans, equity is irrelevant, as eligible veterans are allowed to borrow up to 100% of the value of their properties.
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Loan Amount: VA cash-out refinances often allow you to borrow up to 100% of your home’s equity. However, some lenders may have lower limits, such as 90%. With the 100% limit, for example, if your home is worth $400,000, you can get a cash-out mortgage loan up to $400,000.
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Cash Out: After paying off your existing mortgage, you receive the remaining funds. Let’s say your closing costs total $5,000. With a new $350,000 and your previously stated equity, you’d receive $145,000 in cash ($350,000 – $200,000 – $5,000).
Important Note: Closing costs vary, and your lender will provide a detailed breakdown of those costs upfront as you navigate the application process. These fees are separate from the VA funding fee, and they can often be paid by your lender in exchange for a slightly higher interest rate.
The Process of Applying for a VA Cash-Out Refinance
Here’s what to expect when you apply for a VA cash-out loan:
- Find a VA-approved lender: Research and compare different lenders to find the best rates and terms. Our team at JVM Lending is very experienced when it comes to all types of VA loans.
- Obtain your COE: Contact the VA or apply online to get your Certificate of Eligibility.
- Gather documentation: Collect financial records, income verification, and other documents required by your lender.
- Complete the application: Fill out your loan application online.
- Appraisal and underwriting: JVM will order a home appraisal and review your submitted loan application.
- Closing: If approved, attend a closing appointment to sign the final paperwork and receive your cash (if applicable).
Who Is Eligible for a VA Cash-Out Refinance?
To qualify, you must meet the VA’s service requirements. These vary depending on when you served and your service status (active duty, veteran, National Guard, Reserves, surviving spouse).
Important Note: You’ll need to obtain a Certificate of Eligibility (COE) from the VA to prove your eligibility to lenders.
Here’s the best way to get the most accurate and up-to-date eligibility information:
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Visit the VA Website: Go to the official Department of Veterans Affairs benefits website. They have comprehensive sections dedicated to eligibility broken down by service status.
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Certificate of Eligibility (COE): The surest way to confirm your eligibility is to apply for your COE. You can apply through a trusted VA-approved lender or directly through the VA’s eBenefits portal.
VA Cash-Out Refinance Guidelines: What You Need to Know
While VA cash-out refinances offer significant advantages, it’s essential to understand the eligibility guidelines and lender requirements to ensure you qualify. Here’s a breakdown of the key areas:
- VA Eligibility: The foundation of any VA loan is meeting the VA’s service requirements. These vary depending on whether you’re active duty, a veteran, a member of the National Guard or Reserves, or an eligible surviving spouse. You can find comprehensive eligibility details on the Department of Veterans Affairs website.
- Certificate of Eligibility (COE): This document issued by the VA verifies that you meet their eligibility standards. Your lender will require a COE as part of the application process.
- Credit and Income: VA guidelines are often more flexible than those for conventional loans. However, lenders will still review your credit score and debt-to-income ratio (DTI) to assess your ability to repay the loan.
- Appraisal: An appraisal by a VA-approved appraiser is needed to determine the fair market value of your home. This value is the basis for calculating your loan-to-value ratio (LTV).
- Primary Residence: The property you intend to refinance must be your primary residence. VA loans don’t apply to vacation homes or investment properties.
- Lender-Specific Requirements: Individual lenders may have additional overlays or criteria beyond the VA’s baseline guidelines. Factors like minimum credit scores, maximum LTV limits, or debt-to-income ratio ceilings might vary from lender to lender.
Important Reminder: The VA funding fee will apply to your cash-out refinance. However, under certain circumstances, such as receiving VA disability compensation, this fee may be waived.
Maximizing Your VA Cash-Out Refinance: Understanding LTV
When considering a VA cash-out refinance, one of the key factors to understand is the loan-to-value ratio (LTV). Your LTV is calculated by dividing your desired loan amount by your home’s appraised value. The VA cash-out refinance LTV guidelines are generally flexible, often allowing you to borrow up to 100% of your home’s value. This is a unique advantage compared to many conventional loans.
While the VA sets the upper limit at 100%, individual lenders may have their own requirements. Some lenders may set a max LTV for VA cash-out refinances at 90% or slightly lower. These lender-specific limits often depend on your credit score, debt-to-income ratio, and other financial factors.
Why is the VA cash-out refinance max LTV important?
- Cash-out potential: A higher maximum LTV means you could access more of your home’s equity as cash during the refinance.
- Equity Requirements: If you’re able to leverage the 100% LTV limit, you don’t necessarily need to have any existing equity built up in your home.
- Lender Risk: Lenders might view loans with higher LTVs as slightly riskier, which could potentially affect your terms and interest rates.
Remember: Even with generous LTVs, closing costs and the VA funding fee are costs to consider when looking at a VA cash-out refinance. Make sure to take them into account when you’re calculating how much cash you can expect to receive.
Reach out to JVM Lending if you have questions about understanding your LTV potential.
Should You Consider a VA Cash-Out Refinance?
A VA cash-out refinance can be a smart financial move if:
- You need access to cash: Maybe you have unforeseen expenses, want to fund a renovation project, or wish to consolidate debt.
- You want to lower your interest rate: Refinancing into a VA loan could potentially secure a more favorable interest rate than your current mortgage.
- You wish to eliminate mortgage insurance: Skip the PMI premiums that usually come with conventional loans when you make a down payment of less than 20%.
- You qualify for a shorter loan term: Some borrowers opt for this route to pay off their homes faster, while potentially gaining a more favorable interest rate in the process.
Factors to Consider Before Refinancing
Before you decide to proceed with a VA cash-out refinance, it’s crucial to consider several key factors. First, be mindful of the closing costs associated with refinancing, as these can impact the overall financial benefit of the process. Additionally, you’re likely to incur a VA funding fee, although exemptions exist for certain individuals. It’s also important to check whether your current mortgage carries any prepayment penalties, as this could increase the upfront costs of refinancing. Lastly, reflect on how a VA cash-out refinance fits into your broader financial strategy, ensuring it contributes positively to your wealth-building and financial stability objectives.
Choosing A Trustworthy VA Lender
Many companies specializing in VA financing pretend to care about veterans, but still charge exorbitant interest rates. Our VA division at JVM Lending is run by the wife of a veteran, and she is adamant about offering the best financing terms on the market to every veteran who comes our way. And that is why our VA loan rates are lower than those offered by most other lenders. Meet Jenna Armstrong – a Senior Manager at JVM Lending and the wife of a longtime Navy Veteran. You can read more about our VA division here.
VA Cash-Out Refinance FAQs
Can I do a VA cash-out refinance on a conventional loan?
Absolutely! This is a great way to potentially take advantage of the benefits that VA loans offer.
Is there a limit on how much cash I can take out?
Generally, you can refinance up to 100% of your home’s appraised value, but some lenders might have lower limits.
Do I have to pay closing costs?
Yes, VA cash-out refinances do involve closing costs, which can include appraisal fees, title fees, and origination fees. However, you might be able to roll these costs into your new loan.
What’s the difference between a VA cash-out refinance and a VA Interest Rate Reduction Refinance Loan (IRRRL)?
An IRRRL, also known as a VA streamline refinance, is specifically designed to lower your interest rate or change your loan term. It’s a simplified process available only to those with an existing VA loan. A VA cash-out refinance gives you cash back and can be used to refinance both VA and non-VA loans.
Is a VA cash-out refinance the same as a home equity loan?
While both allow you to tap into your home’s equity, they are different. A VA cash-out refinance replaces your existing mortgage, while a home equity loan or line of credit (HELOC) is a second loan taken out in addition to your primary mortgage.
The Bottom Line: Is a VA Cash-Out Refinance Right for You?
If you’re an eligible veteran, active-duty service member, or surviving spouse, a VA cash-out refinance can provide significant financial benefits. It’s a fantastic way to access your equity, improve your financial situation, and potentially secure better mortgage terms.
If you’re wondering if a VA cash-out refinance is right for you, start your JVM Lending loan application online or contact us at (855) 855-4491 or [email protected].
