VA Cash-Out Refinance
- May 26, 2023
- Ashley Cantley
- Home Loans
For eligible military personnel, veterans, and their spouses, a VA Cash-Out Refinance loan could be just what you’re looking for. Read on to learn what exactly this loan program is, how it works, the eligibility requirements, and things to consider before opting into this program.
What Is VA Cash-Out Refinance?
A VA Cash-Out Refinance is a Department of Veterans Affairs-backed loan that allows homeowners to exchange their home equity for cash while replacing their current mortgage with a new one under different terms. This type of refinance can be beneficial for those looking to pay off debt, finance home improvements, cover tuition costs, or transition from a non-VA loan to a VA loan.
Some of the potential benefits associated with VA loans sometimes include:
- Lower interest rates
- No down payment requirements
- Reduced funding fees
- No monthly mortgage insurance premiums
How Does A VA Cash-Out Refinances Work?
Eligible borrowers can apply for a VA Cash-Out Refinance as they would for any conventional refinancing option. Upon approval, the new VA loan replaces the existing mortgage, and the homeowner receives cash from their home's equity. Here’s what the process looks like in four steps:
- Borrowers will obtain their Certificate of Eligibility (COE) to prove they meet the necessary requirements for a VA loan.
- An experienced Loan Officer who will help the borrower assess their financial situation and determine how much equity they have in their home. This equity will be used to establish the cash-out amount. A home appraisal may be required to verify the home's current market value.
- Once the loan is approved, the existing mortgage will be paid off, and a new VA loan will replace it.
- The borrower will receive cash to use as desired. The cash-out amount will be determined by the difference between the new loan amount and the outstanding balance on the existing mortgage, minus any closing costs.
VA Cash-Out Refinance Requirements
A VA Cash-Out Refinance can be an excellent option for eligible homeowners looking to access their home equity and potentially secure better mortgage terms. However, there are specific requirements that applicants must meet to qualify for this program. Here, are the requirements and steps for this type of loan:
- Home Appraisal - A home appraisal is a crucial part of the VA Cash-Out Refinance process, as it determines the current market value of the property. This appraisal is conducted by a professional, certified appraiser, who will assess the home's condition, size, location, and other factors to determine its worth. The appraised value will help establish the loan-to-value (LTV) ratio, which is essential for calculating how much equity homeowners can access through the cash-out refinance.
- VA Entitlement - To qualify for a VA Cash-Out Refinance, applicants must have sufficient VA entitlement or eligibility for VA benefits. This means they must be active military personnel, veterans, or the spouse of a service member who died in the line of duty or as a result of a service-connected disability. Homeowners can verify their entitlement by obtaining a Certificate of Eligibility (COE) from the Department of Veterans Affairs.
- Debt-to-Income (DTI) Ratio - Lenders will evaluate the borrower's debt-to-income (DTI) ratio when considering a VA Cash-Out Refinance application. This ratio compares the borrower's monthly debt obligations (such as mortgage, credit card, and loan payments) to their gross monthly income. A lower DTI ratio indicates a healthier financial situation and a higher likelihood of repaying the loan. Although the VA does not set a specific maximum DTI ratio, a ratio below 41% for VA loan applicants is generally ideal.
- Credit Check - The VA does not set a minimum credit score, but it’s best to check with your Loan Officer who will advise you on the specific lending requirements.
- Funding Fee - The VA charges a funding fee for the Cash-Out Refinance program, which helps cover the costs of administering the loan. The funding fee varies based on the borrower's military service category and the number of times they have used a VA loan. First-time users with regular military service typically pay lesser of a funding fee compared to second- or third-time homebuyers. Veterans with service-connected disabilities may be exempt from paying the funding fee altogether.
- Closing Costs - Closing costs are fees associated with processing the refinance, such as origination fees, title insurance, recording fees, and appraisal fees. These costs can vary depending on the lender and the loan terms but are typically between 2% and 5% of the loan amount. Some lenders may allow borrowers to roll these costs into the new loan, while others may require payment upfront.
- Loan Disclosures and Closing - Once the borrower has met all the necessary requirements, the lender will provide loan disclosures detailing the terms and conditions of the new loan. After signing the loan documents, the closing process will finalize the refinance transaction, and the homeowner will receive the cash from their home equity.
An experienced Loan Officer will help you navigate this process smoothly and make the most of your VA benefits.
Should you get a VA Cash-Out Refinance?
When deciding if a VA Cash-Out Refinance loan is right for you, here are three things to consider before refinancing:
- Look at your current mortgage terms and interest rate and check to see if refinancing could provide a lower rate or better terms.
- Consider your financial goals and how accessing your home equity could help you achieve them. Common reasons for a VA Cash-Out Refinance include home improvements, debt consolidation, investing, or other large expenses.
- Check your Eligibility. To qualify for a VA Cash-Out Refinance, you must be an active duty or retired veteran with a VA Certificate of Eligibility and meet the required active service days. Additional requirements, such as the debt-to-income ratio and credit check, will likely be a factor as well.
A VA Cash-Out Refinance can be a valuable financial tool for eligible homeowners. An experienced Loan Officer can work with you to help you decide if this loan is the right for you.
What is the difference between VA Cash-Out Refinance and VA Streamline Refinance?
A VA Cash-Out Refinance allows homeowners to take out cash by exchanging their home equity, while a VA streamline refinance is for borrowers who do not want to take out cash and only seek to refinance their current VA mortgage loan. The key difference between a VA Cash-Out Refinance and a VA Streamline Refinance lies in their specific purposes and eligibility requirements.
VA Cash-Out Refinance:
- Designed to allow eligible borrowers to access their home's equity and use the cash for various purposes, such as paying off debt, making home repairs or remodeling, and other financial needs.
- Available for both VA and non-VA loans, allowing borrowers to refinance their existing mortgage into a new VA loan.
VA Streamline Refinance:
- Also known as the Interest Rate Reduction Refinance Loan (IRRRL), is specifically for borrowers who already have a VA loan and wish to refinance it to obtain a lower interest rate and reduce their monthly payments.
- More streamlined and faster process because this option does not allow for cashing out home equity and requires less paperwork than a Cash-Out Refinance.
Both refinancing options offer competitive interest rates and various benefits exclusive to VA loans, such as no monthly mortgage insurance premiums and the ability to finance the VA funding fee. However, the choice between these two options depends on the borrower's specific needs and financial goals. A Loan Officer with New American Funding can help you determine the most suitable VA refinance option based on your eligibility and requirements.
Alternatives To A VA Cash-Out Refinance
Alternatives to a VA Cash-Out Refinance loan offer different benefits and drawbacks, depending on your financial situation and goals. Here’s a look at the options:
Conventional Cash-Out Refinance: This traditional refinancing option allows you to replace your existing mortgage with a new one, cashing out a portion of your home's equity in the process. Conventional Cash-Out Refinances typically require good credit scores and have stricter qualifications than VA loans, but they can offer competitive interest rates and terms.
FHA Cash-Out Refinance: This refinancing option is backed by the Federal Housing Administration and allows you to refinance your mortgage, cashing out a portion of your home's equity. FHA Cash-Out Refinances have more lenient credit requirements than conventional loans, but they may come with higher mortgage insurance premiums and fees.
Home Equity Line of Credit (HELOC): A HELOC is a revolving credit line that uses your home's equity as collateral. It allows you to borrow money as needed up to a certain limit and repay it over time, making interest-only payments during the draw period. Once the draw period ends, you'll need to make principal and interest payments. HELOCs typically have variable interest rates, which can be a disadvantage if rates rise.
Home equity loan: Like a HELOC, a home equity loan uses your home's equity as collateral but provides you with a lump-sum payment instead of a credit line. Home equity loans typically have fixed interest rates and monthly payments, offering more predictability than a HELOC. However, you'll need to pay interest on the entire loan amount, even if you don't use all the funds.
What is the seasoning period for a VA Cash-Out Refinance?
A seasoning period is the minimum amount of time required before a homeowner can refinance their existing VA loan with a VA Cash-Out Mortgage Refinance. For the VA Cash-Out Refinance program, the seasoning period is 210 days from the date of the first payment made on the existing VA loan.
How long do you have to wait to do a VA Cash-Out?
You must wait for at least the 210-day seasoning period before you can apply for a VA Cash-Out Refinance. This period ensures that homeowners have a stable payment history on their current mortgage before refinancing to a new loan.
What are the VA Cash-Out Refinance credit score requirements?
While the Department of Veterans Affairs does not set a specific minimum credit score requirement for VA Cash-Out Refinances, individual lenders may have their own guidelines. An experienced Loan Officer can advise you.
Can I refinance with a 100% VA Cash-Out?
Yes, the VA Cash-Out Refinance program allows eligible homeowners to refinance up to 100% of their home's value. This means you can potentially access the full equity of your home as cash during the refinancing process.
Is it worth doing a VA Cash-Out Refinance?
Whether a VA Cash-Out Refinance is worth it depends on your individual financial situation and goals. This type of refinance can be beneficial if you want to access a large amount of cash quickly, get rid of mortgage insurance, or refinance a non-VA loan into a VA loan with more favorable terms. However, it's essential to consider factors such as interest rates, closing costs, and your long-term financial goals before deciding if a VA Cash-Out Refinance is the best option for you.
How much does the VA charge for Cash-Out Refinance?
The VA charges a funding fee for Cash-Out Refinances, which is typically lower for first-time and subsequent users. However, some veterans may be exempt from paying the funding fee if they receive disability compensation or are entitled to receive it due to a service-connected disability, among other reasons. An experienced Loan Officer can advise you on specific fee costs.