VA cash-out refinance: Often overlooked program for veterans
The VA home loan program was created more than 70 years to provide affordable homeownership to U.S. military veterans.
To date, over 22 million current and former members of the U.S. Armed Forces have taken advantage of a VA mortgage.
The loan provides zero-down home buying and never requires mortgage insurance.
But the program extends beyond helping the home buyer.
It helps the homeowner, too, by offering the VA cash-out refinance option, with which the eligible veteran can tap into their home equity and receive cash back for any purpose.
Like all VA loans, the program requires no mortgage insurance, even though any other loan type on the market requires it for loans with less than 20 percent equity.
The VA cash-out loan is the only refinance available today that permits cash to the borrower with a loan-to-value of 100 percent.
For veterans, this loan could be the best way to put home equity to work to complete long-standing financial goals.
Rates are low, and approval is easier than for standard cash-out programs.Verify your VA cash out eligibility now (Jan 25th, 2020)
What is a VA cash-out refinance?
A VA cash-out refinance is a type of VA loan that allows the homeowner to turn their home equity into cash and is one of three VA loan subtypes, which are:
- The VA home purchase mortgage
- The VA streamline refinance (aka Interest Rate Reduction Refinancing Loan or IRRRL)
- VA cash-out refinance
The VA cash-out is the more flexible of the two VA refinance options. It allows you to:
- Receive cash back at the closing of the loan
- Refinance a non-VA loan
A VA streamline refinance allows a loan size only big enough to pay off the existing loan and pay for closing costs. And, the veteran must have a current VA loan already.
The cash out option, though, allows the veteran to open a loan amount up to 100 percent of the home’s value, receiving cash back to use to pay off other debt, buy a car, pay for home improvements, or any other purpose.
As an example, an eligible veteran/homeowner owns a home worth $200,000. Her existing loan balance is $150,000. She can open a VA cash-out loan for up to $200,000 and receive $50,000 at closing, less closing costs.
This loan is an excellent tool with which veterans can raise large amounts of cash quickly.
Remove mortgage insurance or convert a non-VA loan
Cash isn’t the only reason to open a VA “cash-out” loan. In fact, the name for this loan is a bit misleading.
The VA cash-out can pay off and refinance any loan type, even if the applicant does not plan to receive cash at closing.
The veteran can 1) pay off a non-VA loan, 2) get cash at closing, or 3) do both simultaneously.
The VA streamline loan, rather, is a VA-to-VA loan program only.
And, because VA loans do not require mortgage insurance, veterans can reduce their homeownership costs by paying off an FHA loan and canceling their FHA MIP. Likewise, the veteran homeowner can refinance out of a conventional loan that requires private mortgage insurance (PMI).
Here’s an example.
A veteran purchased a home with an FHA loan in 2016. The outstanding loan amount is $250,000. The FHA mortgage insurance cost is $175 per month.
The veteran can use a VA cash-out loan to refinance the FHA mortgage into a VA one — even if he does not want to take additional cash out. The veteran now has a no-mortgage-insurance loan and, potentially, a new lower rate.
VA financing can be used to pay off any loan with unfavorable terms:
- an Alt-A loan with a high-interest rate
- Interest-only loans
- First and second mortgage combo “piggyback” loans
- Standalone second mortgages
- Any loan that requires mortgage insurance
- Construction liens
- Judgment or tax liens
- Bridge loans
In short, you can pay off any home loan, regardless of the type of loan it is.Verify your VA cash out loan eligibility (Jan 25th, 2020)
Use VA to refinance a high-LTV mortgage (HARP alternative)
The housing downturn happened nearly ten years ago, but many veteran homeowners are still feeling the effects.
Tens of thousands of homeowners nationwide are underwater on their mortgages, meaning they owe more than the home is worth.
The good news — for veterans, anyway — is that the VA cash-out refinance can be opened for up to 100 percent of the home’s value. The VA program can refinance a loan to a lower rate even if the homeowner is nearly underwater.
For instance, a veteran received a non-VA loan for $200,000 at an interest rate of 6.5 percent.
Home values dropped, and she was unable to refinance into a conventional loan.
As an eligible veteran, she opens a VA cash-out loan for 100 percent of the home’s current value, paying off the high-interest loan, and reducing her monthly payment.
The popular HARP program was created to help underwater homeowners, but it is only available to those with Fannie Mae- or Freddie Mac-owned mortgages.
The VA cash-out loan is a HARP alternative because it allows eligible veterans to refinance no matter who owns the current mortgage, and even if they owe nearly as much as their home is worth.
Lenders do not require any equity in the home to use a VA refinance.
VA cash-out requirements
VA cash-out loans require documentation similar to that required for a VA home purchase loan.
A new appraisal is required to establish current value of your home. You will also need to provide income documentation like paystubs, W2s, and, potentially, tax returns.
Bank statements may be required, as well as, an itemized list of debts to be paid off with loan proceeds.
The lender will verify that your income is enough to pay the new VA loan payment.
VA lenders typically allow a debt-to-income ratio up to 41 percent. That means your new home payment plus all other monthly debt payments (car payments, student loans, etc.) can “use up” as much as 41 percent of your before-tax monthly income.
Because VA cash-out loan requirements are more stringent, you should choose a VA streamline if you have a VA loan currently, or do not need cash out. VA’s streamline option does not require an appraisal or income verification.
You will also need to establish eligibility based on military service. Eligibility is based on the amount of time served, and the period in which you served. You are probably eligible if:
- You served 90 days in wartime and are now separated
- 90 days and are still on active duty
- 181 days in peacetime and are now separated
- 2 years if enlisted in the post-Vietnam era
- 6 years in the National Guard or Reserves
- Or, if you are a surviving spouse.
Eligibility can also be established for other servicepersons with an other-than-dishonorable discharge. VA-approved lenders can check eligibility, often within minutes, via direct online requests to VA.
If you have any U.S. military experience whatsoever, it’s worth checking your eligibility for a VA loan.Verify VA cash out loan rates (Jan 25th, 2020)
VA cash-out refinance loan limits
VA cash-out loan limits match those of VA home purchase loans. In 2020, the standard VA loan limit is $510,400 for a one-unit home in most areas of the country. Some high-cost areas permit larger maximum loan limits, up to $765,600.
Keep in mind, though, that VA loan limits are only the limit on which VA requires zero equity in the home. You can open a larger VA cash-out loan than the stated VA maximum.
You do this by retaining equity equal to 25 percent of the loan amount that exceeds the local limit.
For instance, the local limit is $510,400 and you open a VA cash-out refinance for $524,100. You would need to retain at least $25,000 (25 percent of $100,000) in home equity to qualify for the loan.
Most homeowners, though, don’t require VA loans over the local limit. In fact, according to 2016 data from VA, the average VA refinance loan was just over $250,000.
VA cash-out loans to consolidate mortgages, other debt
Borrowers can take cash out of their homes at the same time they combine first and second mortgages into a single low-cost VA loan. That’s true even if the current mortgages aren’t VA loans.
For example, a veteran purchases a home with an FHA loan then later receives a second mortgage from a local bank.
The eligible homeowner can pay off both loans, eliminate mortgage insurance, and consolidate both loans into one.
If there is cash left over, the homeowner can cover medical bills, handle a family emergency, start a business, pay off high-interest short-term loans or almost any other purpose.Verify your VA cash out loan eligibility (Jan 25th, 2020)
VA cash-out refinance Q&A
Below are commonly asked questions about the VA cash-out refinance program.
A VA streamline doesn’t require an appraisal — or bank statements or pay stubs, W2s, or tax returns, either.
However, it is only available if
– You have a VA loan currently
– You don’t need any cash at closing
A VA cash-out is the only VA refinance program that allows you to cash out your home’s equity and refinance out of any loan type.
Yes. VA cash-out loans are available up to 100 percent of the home’s current value. To establish new value, an appraisal is required.
No. The property on which the VA loan is opened must be the borrower’s primary residence.
You can obtain a VA cash-out loan for up to 100 percent of your home’s value, plus the VA funding fee. For instance, if a veteran’s home appraises at $100,000 and he pays a 2.15 percent funding fee, his total loan amount can be up to $102,150.
Veterans can also add the cost of energy-efficient improvements to the total, even if that raises the loan amount above the full value of the home.
Yes. For first-time use, the funding fee is equal to 2.15 percent of the loan amount. If you’ve used your VA home loan benefit before, the funding fee will be 3.3 percent.
Yes. You can pay off and refinance any loan type and can use it to get out of a loan with a high rate or one that has mortgage insurance.
Yes, a VA cash-out refinance can pay off any loan.
Yes, and there are no restrictions on what you use the cash for. The VA lending handbook says cash can be used for “any purpose acceptable to the lender.” If your lender has a problem with what you are using your cash for, try another lender.
A NewDay 100 is a 100 percent loan-to-value VA cash out loan, branded with this name. It is exactly the same program as you can get with any VA-approved lender that offers a VA cash out up to the full value of your home.
Texas imposes strict home equity laws that limit cash out financing to 80 percent loan-to-value. Texas law supersedes VA’s 100 percent financing guideline for cash out loans. If you were turned down, it may have been because you had less than 20 percent equity in your home.
The lender was wrong. And, it probably should have put you into a VA loan. Other loan programs typically cost more than VA, with higher rates, mortgage insurance requirements, and higher down payments. Now is a good time to remove unwanted loan characteristics with a VA refinance.
Typically, yes. According to mortgage software company Ellie Mae, VA rates, in general, run about 0.25 percent lower than rates for conventional loans. Lenders charge the same rates for VA cash-out loans as for VA home purchase loans.
Current VA mortgage rates are extremely low. Get a no-obligation quote in minutes. No social security number is required to start, and all quotes come with access to your live mortgage credit scores.