VA Cash-Out Refinance: What You Need To Know

If you have a home loan through the Department of Veterans Affairs (VA), you may qualify for a VA cash-out refinance. This program allows you to tap into your home’s equity to fund renovations, debt consolidation and other expenses. It’s important to understand how VA cash-out refinancing works, as well as the eligibility requirements and drawbacks, before deciding if it’s the right option for you.

Key takeaways

• VA loan borrowers can apply for a VA cash-out refinance to access their home’s equity.
• You can also do a VA cash-out refinance to convert a non-VA mortgage into a VA loan.
• You can typically borrow up to 90% of your home’s value.

How does a VA cash-out refinance work?

A VA cash-out refinance is a mortgage that allows qualified military members to borrow more than they owe — up to 90% of their home’s value in most cases — and pocket the difference in cash. VA cash-out refinance loans are backed by the U.S. Department of Veterans Affairs (VA loans), which guarantees a percentage of the loan to protect lenders against losses in the case of default.

The VA cash-out refinance allows eligible borrowers to tap more equity than FHA and conventional cash-out refinances, whose guidelines allow only a maximum 80% loan-to-value (LTV) ratio.

Who is eligible for a VA cash-out refinance?

Active-duty service members, veterans and qualifying spouses may qualify for a VA cash-out refinance. The main thing you’ll need is a certificate of eligibility (COE) from the VA. This document confirms that you meet the minimum requirements to qualify for a VA home loan. You can request a COE through the VA.

In addition to the COE, you’ll also need to meet the lender’s refinance requirements to qualify for a loan. Three of the biggest factors lenders consider when determining whether to give you a mortgage include:

• Debt-to-income ratio (DTI): Your DTI measures how much of your monthly income is tied up in debt. It’s one of the most common tools lenders use to determine whether you can afford the loan’s monthly payments.
• Credit history: Lenders will analyze your credit report, particularly your payment history and account balances, to get a clear picture of your financial situation.
• Occupancy status: You can get a VA cash-out refinance only if your home is your primary residence.

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How much does it cost to do a VA cash-out refinance loan?

There are various closing costs involved with a VA cash-out refinance. One of the biggest expenses is the VA funding fee — which is between 2.15% to 3.3% of the loan amount, depending on whether you’ve had a VA loan before. Fees are less if you make a down payment of 5% or more. The VA also requires a professional appraisal to ensure your home meets its requirements. The fees for a VA appraisal depend on your location and property type.

However, there are some fees VA borrowers don’t have to pay — these are known as non-allowable fees, and they include attorney and real estate agent charges.

VA cash-out refinance pros and cons

How to get a VA cash-out refinance loan

1. Compare VA lenders

Start by getting loan estimates from a few different lenders to compare rates and terms. For the most accurate comparison, aim to request estimates on the same business day. Since rates fluctuate daily, requesting estimates close together helps ensure you’re comparing apples to apples.

  Searching for lenders? Check out our list of the best refinance lenders.

2. Submit your application

Once you’ve found a lender, it’s time to apply for the loan. This step involves handing over various documents to your lender, including your certificate of eligibility, pay stubs, tax returns and bank statements.

3. Close on the loan

As with any mortgage loan, you’ll need to go through a closing process for your VA cash-out refinance. During this time, you’ll need to provide any additional information requested by your lender, complete the appraisal and pay the closing costs.

VA cash-out refinance vs. VA streamline: Which should I choose?

Another popular VA loan refinance option is the VA streamline, or interest rate reduction refinance loan (IRRRL). If you currently have a VA loan, you can skip the income documents and the cost of an appraisal because you don’t need either. An added bonus: The funding fee is only 0.5% on a VA streamline loan.

However, you can’t get extra cash out unless you’re using it to pay for closing costs. Use the table below to determine which of these programs is best for you.

Alternatives to a VA cash-out refinance

• Conventional cash-out refinance. Conventional loans don’t require any mortgage insurance or funding fees, though they do limit you to an 80% LTV. You can tap equity from a second home or investment property, though the maximum LTV is lower.
• FHA cash-out refinance. Borrowers with credit scores as low as 500 may be approved to borrow up to 80% of their home’s value with an FHA cash-out refinance. With this loan, you’ll pay two types of FHA mortgage insurance, which may make your payment significantly higher than a comparable VA cash-out refinance.
• Home equity line of credit (HELOC). A HELOC is like a credit card secured by your home. You’ll make payments only on the balance you charge, and you can draw funds during a set time called a draw period. After the draw period ends, you’ll pay off the balance in monthly installments until it’s paid in full.
• Home equity loan. A home equity loan is received in a lump sum and paid back in fixed installments, usually in five to 30 years. It may be a good option if you want to leave your first mortgage alone but desire the predictability of a fixed monthly payment.