Understanding The VA Cash-Out Refinance (Refi): The Veteran’s Aid and Assistance (VA) is a government program that financially assists veterans or their families. A cash-out refinance with a VA guarantee allows you to replace your current loan with a new one on more favorable terms. If you want to withdraw money from your home equity or refinance a non-VA loan into a VA-backed loan, a VA-backed cash-out refinancing may be the answer. Continue reading to learn more about how refinances work and if a VA cash-out refinancing is right for you.
Read More: Is Now a Good Time to Refinance Your Mortgage?
What Is a VA Cash-out Refinance?
A VA cash-out refinance, also known as a “refi” is a government-backed mortgage that allows you to exchange your existing mortgage for a less expensive alternative. It enables veterans, active duty service members, members, and surviving spouses who meet the requirements to borrow up to 100% of the appraised value of their house. All mortgage borrowers — including those with a VA loan — may use the VA cash-out refinance if they meet the required conditions. You can refinance into a larger loan and use the extra money for many things, such as home improvements or paying closing costs by using the cash-out alternative.
Another option is an interest rate reduction refinance loan (IRRRL), which is only available to people with a VA loan. It works similarly to refinancing a standard loan, allowing you to obtain a lower interest rate, extend your term, or modify other conditions. It’s also possible to refinance a non-VA loan into a VA loan, which often has better conditions than a conventional loan.
Who Is Eligible for a VA Cash-out Refinance?
To begin with, you don’t need to have a VA loan already to participate in the program. It’s possible to get a VA cash-out loan regardless of what type of conventional mortgage you have. However, you must be eligible for the program, and only certain people are qualified.
Applicants must fulfill the following criteria to be eligible for a VA loan:
- Served on active duty for a minimum of 24 continuous months or mobilized for 90 days.
- Mobilized before August 1st, 1990, for at least 181 days.
- Provided six years of creditable service in the Reserves or National Guard or at least 90 days under Title 10 or Title 32, with at least 30 being consecutive.
- If you were medically discharged, service time requirements may be waived.
- Be the surviving spouse of a service member who died in the line of duty.
To obtain VA loan benefits, you’ll need a copy of a Department of Veteran Affairs Certificate of Eligibility (COE), which confirms that you’ve satisfied the minimal prerequisites necessary to get a loan. Any veterans and service members wanting to apply must have been honorably discharged and have a credit score of 680 or more. You can only cash out 90% of your home’s equity if your credit score is less than 680.
How Does a VA Cash-Out Refinance Work?
The federal government backs VA loans, so these loans pose a lesser overall risk to lenders. That indicates that borrowers who use these programs can get financing with better terms than those who apply for personal loans through banks or other lending institutions. The application procedure for a VA cash-out loan is comparable to a conventional loan. It begins by researching lenders, examining loan conditions, and — after comparing each lender’s terms — selecting a financial institution to work with, then submitting a loan application.
VA Cash-Out Refinance Cost and Fees
All VA loan applicants must pay a fee to the Department of Veterans Affairs, known as the VA funding fee. This is a one-time expense that helps keep the program running. The funding fee varies depending on whether you are using your first VA home loan or not:
- First-time borrowers: 2.3%
- Borrowers who have taken out a VA loan in the past: 3.6%
The interest rate has a significant role in the overall cost of the mortgage. Because the government partially insures VA loans, they are considered less risky than standard mortgages. As a result, VA cash-out refinancing rates are typically lower than those for traditional cash-out refinance loans. Before applying for a VA cash-out refinance, compare loan alternatives from several lenders to ensure that it is a good financial fit for you.
When to Consider A VA Cash-Out Refinance
There are a few situations when a VA cash-out refinance makes sense. For example, if you:
- Need Help Paying For Closing Costs: Unlike a VA streamline refinance, a VA cash-out refinancing does not allow you to roll your closing costs into your loan balance. However, you can use the cash you receive to cover those expenses. Closing charges can range from 2% to 5% of your overall loan amount, a significant sum of money you may not be able to pay upfront.
- Need Help Paying Other Expenses: Another incentive to go with a VA cash-out refinance over an IRRRL is the opportunity to obtain financing for essential expenditures at a low-interest rate. You may use the money to pay off other high-interest debt, pay for college, or make home improvements to boost the value of your home.
- Want To Refinance a Non-VA loan Into a VA Loan: There isn’t a need to take out cash, so you could always just refinance and utilize the cash-out option to acquire a VA loan.
How Can I Get a VA-Backed Cash-Out Refinance Loan?
Find a Lender
To get a cash-out to refinance loan, you’ll go through a private bank, mortgage firm, or credit union. Terms and costs may differ, so talk with several lenders to see what fits your needs.
Request Your Certificate of Eligibility (COE)
You’ll need to provide your COE, which will serve as proof that you qualify for the home loan benefit to your lender.
Give Your Lender Any Necessary Information
You’ll also need to supply your lender with the following items:
- Copies of paycheck stubs for the most recent 30-day period.
- W-2 forms for the previous two years.
- A copy of your federal income tax returns for the last two years (required by many, but not all lenders).
- Any other information your lender requires.
Follow Your Lender’s Process for Closing on the Loan, and Pay Your Closing Costs
You may be charged a VA funding fee at closing. Because the VA mortgage program does not demand down payments or a monthly mortgage insurance payment, this one-time charge reduces the cost of the loan for American borrowers. Your lender will also charge interest on top of any closing costs.
How To Find the Best VA Cash-out Refinance Lenders
Not all lenders are authorized to provide VA loans, even though these loans are funded by private lenders rather than the VA itself. You’ll need to locate an approved lender to apply for a VA cash-out refinancing. Because criteria and terms differ, comparing rates from several vendors is a good idea before filling out an application.
Look into banks, credit unions, and internet lenders to discover the best VA mortgage provider for you. Keep in mind that many internet lenders will allow you to submit a few key details and will provide an estimate immediately instead of going through the whole application procedure and a rigorous credit check.
Saving Money With a Cash-out Refinance
Regarding your mortgage, there are several ways to save money. For example, you might refinance to obtain a loan with better terms and rates. You may also use your home equity to pay off high-interest debt or increase the value of your property by leveraging. A VA cash-out refinance loan might also help you accomplish these goals. This refinancing option, however, does not always result in savings. It’s essential to crunch the numbers and be sure that it is worthwhile for your circumstances before pursuing this option.
Suppose your primary goal is to receive money. In that case, there are other choices you can explore, including a home equity loan or line of credit (which does not charge a VA funding fee), as well as less expensive refinancing alternatives that don’t include a cash-out component.
VA Cash-out Refinance Guidelines
To get a Certificate of Eligibility (COE), which tells potential lenders that you meet the VA’s standards for getting a VA loan, you need to meet specific VA loan requirements.
- Length Of Service: For example, if you’re an active service member or veteran, you’ll need to have served for a set amount of time in most cases.
- Veterans Must Have Been Honorably Discharged: A dishonorable discharge will prevent you from receiving a VA loan.
- Credit Score: The Department of Veterans Affairs does not have any particular credit score, debt-to-income (DTI) ratio or down payment requirements for cash-out refinance eligibility. However, many lenders have their criteria and demand a score of at least 620 to qualify.
- Loan-To-Value (LTV) Ratio: You can refinance up to 100% of your LTV in most situations. On the other hand, some lenders may restrict you to 80% – 90% of your home’s appraised value.
The Bottom Line
For qualified borrowers, a VA cash-out may provide a fantastic chance to put more money back in their pocket to help pay for repairs and improvement, save for retirement, or cover educational costs. Refinancing might help you obtain better loan conditions, such as reduced interest rates, smaller monthly mortgage payments, or removed mortgage insurance fees.
Applying for a VA cash-out loan might be an intelligent way to improve your overall financial health or even extend the time it takes you to repay your debt. Make sure you qualify before beginning the application process and shop around while looking at different lenders. Wondering just how much you could save by applying for a VA cash-out refinance? Contact us for a free consultation.