What You Need To Know About a VA Cash-Out Refinance Loan

Turn any type of home loan into a VA loan and get cash—if you qualify

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A Department of Veterans Affairs (VA) cash-out refinance allows qualified homeowners to take out a VA-backed home loan to replace an existing mortgage, along with additional cash. This program has some unique features and benefits, as well as major differences from other available cash-out refinancing strategies.

Find out how VA cash-out refinance loans work to see if one might be a good refinancing option for you.

Key Takeaways

  • You can use a VA cash-out refinance to replace any type of mortgage, not just a VA loan.
  • Unlike other cash-out refinances, this VA loan lets you cash out up to 100% of your home’s equity.
  • A VA cash-out refinance has a more costly and complex application process than a VA Interest Rate Reduction Refinancing Loan (or VA Streamline), which doesn’t come with cash.

What Is a VA Cash-Out Refinance?

A VA cash-out refinance is a way for homeowners who meet the eligibility requirements to replace their home loan with a new VA-backed loan at a higher amount. This new mortgage amount allows you to take out a lump sum of cash. You can borrow up to 100% of your home’s equity, and you can use the cash for anything you want.

A VA cash-out refinance is an attractive option because it offers access to cash. However, the application process is more rigorous and the costs are higher than with the VA’s other major refinancing program, the VA Interest Rate Reduction Refinancing Loan (IRRRL)

Otherwise known as a VA Streamline, the VA IRRRL is a simpler, faster process than a VA cash-out refinance, and it reduces the interest rate on an existing VA loan.

Other key differences include:

VA Cash-Out VA IRRRL
Can convert any type of home loan to a VA loan Can only be done with existing VA loans
Requires home appraisal No appraisal needed
Full assessment of income, credit, and assets Very simple application
Requires a Certificate of Eligibility (COE) Does not require a COE

Who Would Benefit from a VA Cash-Out Refinance?

In general, refinancing a home loan is a way for the homeowner to lower either their interest rate and/or their monthly payment. It can also be used to switch from one type of loan program to another. If you need a lump sum of cash, a cash-out refinance is a way to replace your home loan and borrow some extra money that’s rolled into the new loan. 

Ultimately, you’ll pay interest on this extra amount, as well as an upfront fee, so it’s important to consider why you’re interested in taking a cash-out refinance. Going on a shopping spree wouldn’t be a good idea, but reasons to take a cash-out refinance could include:

  • Making home improvements
  • Funding a family member’s education
  • Paying off high-interest debt or medical bills

Other factors to consider are the status of your current mortgage and your short-term plans. If you’re more than halfway through your current home loan, or if you plan to move in the next couple of years, for example, then it probably wouldn’t make financial sense to refinance.

A mortgage professional who specializes in VA loans can help you crunch the numbers to see if a VA cash-out refinance loan is a good fit for your situation.

The Consumer Financial Protection Bureau and the VA urge homeowners to be aware of refinancing offer scams. Watch out for unsolicited offers that claim to guarantee a lower interest rate, let you skip mortgage payments, or allow on-the-spot closings.

Who Qualifies for a VA Cash-Out Refinance?

You’ll have to jump through a couple of hoops to qualify for a VA cash-out refinance loan. Here are some of the major eligibility requirements:

  • Certificate of Eligibility (COE): This is the proof you’ll need to show that you or your spouse qualifies for a VA-backed loan. You’ll need to be a veteran, a current service member, a member of the National Guard or Reserve, or a surviving spouse of a veteran who died or was disabled during active duty or service. Depending on your status, the documentation you’ll need may include a copy of your discharge papers, a statement of service signed by your commanding officer, and/or proof of honorable service.
  • Credit requirements: VA home lenders determine the minimum credit score requirements. The better your credit score, the more likely you will qualify for the refinance and be offered the most competitive interest rates. In April 2021, the average VA refinance FICO score was 731.
  • Income requirements: Different lenders’ standards will vary, but you’ll have to prove that you can afford your new loan payment. Be prepared to supply copies of paycheck stubs from the last 30 days, as well as W-2 forms and/or federal income tax returns for the last two years.
  • Residency: The home must be your primary residence.

If you apply, you will also have to get a home appraisal to determine the home’s value since the cash you borrow will come from the equity. 

VA Cash-Out Refinance vs. Other Cash-Out Refinances

The VA cash-out refinance is different from other types of cash-out refinances. For starters, it’s the only one in which borrowers may be allowed to borrow up to 100% of the home’s equity. Other cash-out loan programs usually cap out at 80%. In fact, in 2019 the Federal Housing Authority (FHA) reduced its maximum loan-to-value ratio for cash-out refinance loans from 85% to 80%, putting it on par with conventional cash-out refis.

In addition, because a VA cash-out is backed by the Department of Veteran Affairs, rates and terms tend to be more favorable than with conventional cash-out offers. For example, you don’t have to worry about paying mortgage insurance when you refinance to a VA cash-out loan. But with an FHA cash-out refinance, you’ll pay an upfront mortgage insurance premium plus an annual insurance premium.

Another major difference has to do with eligibility. VA loans are only for veterans, military members, and others who meet service eligibility requirements, while anyone can apply for other types of cash-out refinances.

Finally, VA cash-out rules require that the borrower lives in the home, whereas other loan programs may allow you to do a cash-out refinance on second homes or investment properties.

How Do You Apply?

Before you begin the application process, it’s a good idea to collect quotes from multiple lenders so you can compare rates and fees. Once you settle on a lender, you’ll have to get your COE, fill out the loan application, and submit the requested documents. From there, the loan officer will guide you through each step, including setting up your home appraisal. You may need to answer questions or provide additional documents to the underwriter. 

Once the lender has approved you, you’ll set a closing date and sign all the paperwork for your new loan. You may also need to pay a one-time VA funding fee. Your lender will let you know when to expect your cash payment.

How Much Does a VA Cash-Out Refinance Cost?

The funding fee is the biggest expense you’ll pay for your VA cash-out refinance. For first-time borrowers using this program, the fee is 2.3% of the loan amount. For second-time cash-out refinance applicants, the fee is 3.6%. These fees will be rolled into the new loan so you don’t have to worry about paying out of pocket.

The one upfront cost you will have to pay is for the home appraisal, which can range from $300 to $700 depending on the property’s size and location.

Other closing costs will be itemized and listed on your loan documents, including title fees, loan discount points (if applicable), survey fees, and other incidentals. As with most refinances, you can expect that your total refinancing costs will be around 3% to 6% of your mortgage balance.

Frequently Asked Questions (FAQs)

What’s the debt-to-income ratio for a VA cash-out refinance?

The VA recommends that your debt-to-income ratio be 41% or less. However, individual lenders may choose to go beyond that threshold under certain circumstances.

What’s the maximum loan-to-value ratio for a VA cash-out refinance?

The VA allows homeowners to borrow up to 100% of the home’s equity in a VA cash-out refinance loan. However, some lenders may choose to max out at an LTV of 90%, so it’s important to ask potential lenders about their policies early in the process.

How long does it take to get a VA cash-out refinance?

Because there are so many moving parts (including underwriting, title search, appraisal, and more), you can expect that a VA cash-out refinance will take about as long to close as a typical mortgage or refinance. In April 2021, the average VA refinance loan took 59 days to close, which was slightly longer than the 53-day average for all refis.