What is a VA Cash-out refinance loan? This VA refinance option is similar in some ways to conventional cash-out refinancing, and very different in others.
VA cash-out refinancing can be used to pull equity out of your home in cash, but it can also be used to get a borrower out of a non-VA mortgage which likely requires (among other things) mortgage insurance premiums in the case of FHA loans, or private mortgage insurance for conventional mortgages.
What Is Cash-out Refinancing?
VA cash-out refi loans are VA-backed refinances for “any type of lien or liens” against the home to be refinanced. Such liens can be from “any source” including tax or judgment liens, VA or non-VA, current or delinquent, etc. VA cash-out loans are for owner-occupiers, and cannot be used for investment property or non-residential property.
VA cash-out loans must be a “first lien”, meaning if there are existing liens they must be “subordinate” to the VA loan.
VA cash out loans can be used for a 100% refinance of the home. This was not always true, in years past VA loans of this type were limited to 90% of the home’s appraised value.
Who Offers VA Cash-Out Refinance Loans
The Department of Veterans Affairs does not offer these loans; instead they are offered by qualified participating lenders who operate with the approval and oversight of the Department of Veterans Affairs. You will need to apply via a military-friendly lender, a military credit union that is also a participating lender, or other financial institutions that offer VA mortgages.
VA Loan Funding Fees
This type of refinance loan is subject to a VA loan funding fee. Applicants who receive or are eligible to receive VA compensation for service-connected medical issues may be exempt from this fee, but those exemptions are not automatic. Ask your lender about how to apply for an exemption from the VA loan funding fee.
How VA Cash-Out Loans Work
The VA Lender’s Handbook (VA Pamphlet 26-7) says that for VA cash-out refinance loans, “proceeds beyond the amount needed to pay off the lien(s) may be taken as cash by the borrower”.
That means that it will be crucial to do the math on your current loan to determine how much money will be left over once the original amount has been paid off. You may find your lender requires at least six months and six payments on the original mortgage before any refinance loan will be considered.
Those who consider cash-out options a mere six months into the mortgage may find their options less appealing than those who have paid down more of their principal before the new loan.
Borrowers should remember that any add-ons to the mortgage amount could lower the amount of cash back. In some cases this is not a worry, but for some borrowers the more cash out on the transaction, the better.
Appraisals And Credit Checks Required
There is a certain kind of VA refinance that does not have VA-required appraisals or new credit checks, but any loan that results in cash back to the borrower (that is not a refund) requires both.
The Age Of Your Current Mortgage Counts
The older your current mortgage is, the more cash you potentially have coming back to you on the transaction. The younger your loan is, the smaller your equity is and you may find it’s in your interest to wait a while longer before exploring your refi options.
Cash-Out Refinance Loans Have Closing Costs
Ask your loan officer about the closing costs associated with these types of loans. If you are concerned that such costs may eat into the amount of cash you get at closing time, ask your loan officer for some advice about how to change that ratio.
You may need to wait longer, do some improvements to the home to raise its value, or consider options that do not include add-ons to the loan that could increase costs.
Restrictions On Cash-Out
In general, VA loan rules state that you can use the proceeds from your cash-out refi for any purpose “acceptable to the lender.” You may also use the proceeds to pay for closing costs, discount points, etc.
You Don’t Have To Take Cash-Out
You can use these VA refinance loans to refinance a VA or non-VA mortgage and NOT take cash back on the deal. Ask your participating lender about this option.
You Cannot Skip Payments
No matter what your reason or need for a VA refinance loan, be advised that you are not permitted to skip payments when refinancing. VA loan rules are designed to prevent this.
Maximum Loan Amount
The maximum loan amount will depend on the appraised value of your property; in general the maximum loan guaranty amount is set the same as for VA purchase loans.
The maximum loan amount may also include extra funds for approved energy-efficient upgrades to the home (often referred to as a VA Energy-Efficient Mortgage or VA EEM), and the VA loan funding fee should the borrower choose to finance that fee.
Who Qualifies For VA Cash-Out Refinancing
The same people who qualify for VA loans to purchase a home also qualify for VA cash-out loans. That means you must qualify for the VA loan program with minimum time in service or as a surviving spouse of certain military members who died as a result of service.
But there is another requirement–in addition to being qualified to borrow, the property you are refinancing must also meet VA home loan standards. An appraisal will be required (more on that below) and the home must also be (or will become) your primary residence.
You Need A VA Certificate Of Eligibility
If you want to apply for a VA cash-out refi, you need to have or obtain a VA Loan Certificate of Eligibility (COE). If you do not qualify for a COE, you cannot be approved for a VA refinance loan.
Those who have used their VA home loan benefits before may have used some or all of their VA loan entitlement in that transaction. To qualify for a cash-out loan, VA borrowers must have sufficient entitlement. Here’s where it gets a bit confusing for some applicants:
If you use your VA loan entitlement to buy a home with a VA mortgage and later refinancing it with a cash-out loan, you get your VA entitlement BACK because you paid off the original mortgage and are now using your entitlement to refinance. The old loan being paid off (with the new one) makes it possible for you to restore your previously used entitlement.
For Those Who Need To Apply For A COE
Some VA refinance applicants have borrowed before, some have not. If you have never applied for a VA loan before, your lender can help you obtain a VA Certificate of Eligibility. You can also apply online via the VA official site, or make an appointment at a nearby VA Regional Loan Center. You can also call 877-827-3702 for assistance.
Applying For The Loan
You will need the following documentation to apply for a VA Cash-Out Refi Loan:
- Your most recent 30-day period pay stubs/proof of income
- Previous two years of W-2 forms
- Copies of your last two years of federal income tax returns
- Proof of military service/eligibility
Remember that you will need to meet both the VA minimum requirements and the lender’s income/credit score/employment stability benchmarks. It’s best to treat any refinance loan as seriously as you treated the initial purchase loan. Start working on your credit well in advance of the application and lower your debt ratio aggressively for best results.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
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