VA Home Equity Loan Options

Home equity loans let homeowners turn the equity – or ownership – in their home into cash. Unfortunately, the Department of Veterans Affairs does not offer a VA home equity loan. But, homeowners with an outstanding VA loan do have alternatives. As such, we’ll use this article to outline VA home equity loan options.

Specifically, we’ll discuss the following:

• Can You Get a VA Home Equity Loan?
• Can You Take Out a Home Equity Loan with an Outstanding VA Mortgage?
• Home Equity Loan Options
• VA Cash-out Refinance Loan
• Military Friendly Lenders That Offer HELOCs
• Home Equity Loan and HELOC Options with Civilian Lenders
• Final Thoughts

Can You Get a VA Home Equity Loan?

First- vs. Second-Lien Loans

Before discussing VA home equity loans, we need to provide a brief overview of a related concept: first- and second-lien loans. With a traditional home mortgage, borrowers use loan proceeds to purchase a home. As a result, these loans qualify as first-lien loans. This means that, in the event of a bankruptcy, the lender has the primary claim for repayment.

Conversely, borrowers take out home equity loans in addition to their primary mortgages. As such, these loans qualify as second-lien, meaning that these lenders won’t get paid in bankruptcy until after the first-lien debt has been settled. This means lenders face more risk with home equity loans, so not all lenders offer this loan product.

How Do Home Equity Loans Work?

A borrower’s equity – or ownership – equals the current home value minus the outstanding mortgage. For example, if your home is worth $400,000 and you have a $250,000 mortgage, you have $150,000 in equity ($400,000 value – $250,000 mortgage). Home equity loans allow you to convert this equity into cash. More precisely, lenders issue home equity loans based on three related factors: 1) current home value; 2) outstanding mortgage; 3) loan-to-value (LTV) ratio.

Assume a lender offers a home equity loan up to 90% LTV. Using the above numbers, that means the borrower would qualify for a $360,000 loan ($400,000 value x 90% LTV). However, the lender next deducts the outstanding mortgage balance, as this does not represent owner equity. This means the borrower could take out a $110,000 home equity loan as cash from this property, excluding closing costs ($360,000 home equity loan maximum – $250,000 current mortgage balance = $110,000 allowable home equity loan).

VA Home Equity Loan?

No, the VA does not offer a VA home equity loan. VA loans come with a government guarantee, and the Department of Veterans Affairs will not guarantee second-lien loans. But, as we’ll outline below, VA borrowers have other home equity loan options.

Can You Take Out a Home Equity Loan with an Outstanding VA Mortgage?

As stated, borrowers cannot take out a VA home equity loan. But, you can take out a home equity loan on top of your current VA loan. In other words, if you have an outstanding VA loan on your home, the VA allows you to take out a home equity loan to access the equity. You just won’t receive the guarantee of a VA-backed loan on this new loan.

Continuing the above example, assume that the outstanding $250,000 mortgage was a VA loan. The borrower could not take out a VA home equity loan to access his or her remaining equity. But, if a lender offered a home equity loan with the stated 90% LTV terms, the VA would not prevent you from taking out that additional $110,000 loan as cash. It just wouldn’t be a VA-guaranteed loan.

Qualifying for a Home Equity Loan

The VA may allow home equity loans on top of VA loans, but this doesn’t mean you’ll qualify for one of these loans. Borrowers still need to meet all of the lender-specific requirements to qualify for a new loan. While not an all-inclusive list, common requirements include:

• Available equity in the property
• Minimum credit scores
• Income requirements
• Cash reserve requirements
• Debt-to-income (DTI) requirements

Home Equity Loan Options with Military Friendly Lenders

If you meet the basic financial requirements to qualify for a home equity loan, you next need to identify a specific lender. In this section, we’ll outline military friendly lenders that offer these loan products.

Pentagon Federal Credit Union (PenFed)

PenFed opened in 1935, making it a long-established financial institution supporting the military. Today, it serves more than 2 million members and holds over $25 billion in assets. Despite its name, you do not have to be a military member or veteran to join PenFed. Instead, any US citizen or permanent resident can apply, needing only to maintain a savings account with a $5 minimum balance.

PenFed offers its members home equity loans with the following outstanding terms:

• LTV: borrow up to 90% of your home’s equity
• Loan size: $10,000 to $400,000
• Fixed monthly payments
• Interest-only options
• 5-, 10-, 15-, or 20-year terms

Navy Federal Credit Union (NFCU)

Seven Department of the Navy employees founded NFCU in 1933 to help themselves, co-workers, and family members achieve financial goals. In particular, these founders imagined a credit union offering loans with affordable rates and reasonable terms. NFCU has opened its membership to all military members, veterans, Department of Defense employees, and their families. It currently has over 10 million members.

Normally, NFCU offers home equity loans with extremely competitive terms. However, the credit union has temporarily suspended new home equity loan applications, publishing this notice: Due to unprecedented market conditions, we have temporarily suspended accepting new applications for home equity loans and home equity lines of credit. This update doesn’t affect applications that have already been submitted.

VA Cash-out Refinance Loan

As an alternative to home equity loans, borrowers can access equity in their homes with a VA cash-out refinance. A cash-out refinance uses a new loan to pay off the balance of your current mortgage, with the difference between the new one and old one available as cash.

To demonstrate, we’ll use the above numbers. With a home value of $400,000 and current mortgage of $250,000, a 90% LTV cash-out refinance would equal $360,000 ($400,000 x 90% LTV). But, the first $250,000 of the new loan would pay off the old loan. Then, borrowers would pocket the remaining $110,000 as cash (ignoring closing costs).

Due to this pay-off characteristic, these cash-out refinance loans qualify as first-lien, not second-lien, which is why the VA offers them. And, borrowers can refinance a non-VA or VA loan with a VA cash-out refinance loan.

According to the VA, with a 100% LTV refinance, you can borrow up to the Fannie Mae/Freddie Mac conforming loan limit in most areas – and more in some high-cost counties. However, not all VA-approved lenders will offer 100% LTV on cash-out refinances. Accordingly, you’ll need to discuss loan details with your lender.

Military Friendly Lenders That Offer HELOCs

Home equity lines of credit, or HELOCs, provide borrowers another option for accessing equity.

Home Equity Loan vs. HELOC

While similar, HELOCs have a couple major differences to home equity loans. Conceptually, a HELOC functions more like a credit card than a loan. More precisely, borrowers qualify for a certain HELOC amount, which is based on their current equity. Rather than receive a lump sum to pay back over time, borrowers draw funds against their HELOC whenever they want. And, you only pay interest on the outstanding balance. Once you pay it off, you have access to the entire balance again.

For example, assume you have $100,000 equity in your home and qualify for a HELOC of $90,000. If you need $30,000 to repair a roof, you draw that cash against the $90,000 HELOC balance. While outstanding, you’ll pay interest on the $30,000 – typically at a variable rate. Once you pay it off, you no longer need to pay interest, and you once again can access the entire $90,000 balance. This system can provide borrowers more flexibility than a traditional home equity loan.

As with home equity loans, the VA does not offer HELOCs. Instead, borrowers can work with military friendly lenders to secure one.

Pentagon Federal Credit Union (PenFed)

In addition to home equity loans, PenFed offers its members HELOCs with the following outstanding terms.

• LOC-to-value: line of credit up to 90% of your home’s equity
• LOC size: $10,000 to $400,000
• Interest: variable rates based on the US Prime Rate
• Draw periods: borrowers have access to a variety of draw period options
• Occupancy: offers non-owner-occupied HELOC options

Navy Federal Credit Union (NFCU)

NFCU has also temporarily suspended new HELOC applications.

Home Equity Loan and HELOC Options with Civilian Lenders

Military members and veterans can also access a variety of outstanding home equity loan and HELOC options with civilian lenders. As a result, you shouldn’t restrict your research to the above military friendly lenders. Instead, borrowers should compare rates and terms of organizations like NFCU and PenFed against local credit unions, regional and national banks, and mortgage companies.

Each of the above civilian lenders has its own benefits. Typically, local credit unions are smaller and have less bureaucratic red tape. This means that borrowers often have more flexibility with qualification requirements and loan terms. On the other hand, larger regional and national banks may have stricter requirements, but they also have significantly more assets, which may allow for better terms. Lastly, mortgage companies have the advantage of specialization. That is, these companies focus solely on home loan products (e.g. primary mortgages, home equity loans, and HELOCs), which can provide a more efficient application and loan servicing process.

Regardless which home equity or HELOC option you choose, do your research. At a minimum, borrowers should compare the rates and terms of three different lenders (ideally more). Small differences between products can add up to thousands of dollars in fees and/or interest, so it pays to look at a few options to find the best one.

Final Thoughts

Unfortunately, the Department of Veterans Affairs does not offer a VA home equity loan. This reality should not stop military members and veterans from seeking VA home equity loan alternatives. In particular, VA cash-out refinances, HELOCs, home equity loans without a VA guarantee all provide great options for turning your home’s equity into cash.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.