VA cash-out refinance: How it works and how to get one

A VA cash-out refinance can save you money, lower your interest rate, and give you access to cash back for other financial needs. It also allows you to turn a non-VA loan into a VA loan.

This unique home loan program isn’t available to the general public, though. To qualify for a VA cash-out refinance loan, you must be an eligible military service member, veteran, or surviving spouse.

• What is a VA cash-out refinance?
• How does a VA cash-out refinance work?
• Who’s eligible for a VA cash-out refinance?
• How much does a VA cash-out refinance cost?
• How to apply for a VA cash-out refinance
• Pros and cons of a VA cash-out refinance
• Alternatives to a VA cash-out refinance

What is a VA cash-out refinance?

A VA cash-out refinance is a cash-out refinance loan backed by the federal Department of Veterans affairs. With a VA refinance, you replace your current home loan with a new VA loan.

One of the primary features of a VA cash-out refinance is that it allows eligible homeowners to take cash out of their home equity, often up to 100% of the home’s value. It also allows eligible military members to refinance a non-VA loan into a VA loan.

How does a VA cash-out refinance work?

Eligible homeowners go through a lender, not the VA, to apply for a VA cash-out refinance loan. If you have a current VA loan, you can refinance it, usually to a better rate and terms, and receive cash to pay down debt, education expenses, home remodeling projects, and other financial goals.

A home appraisal will determine your home’s value and how much equity you have built up. A VA cash-out refinance works like a traditional cash-out refinance except that it’s backed by the U.S. Department of Veteran Affairs. Lenders take on less risk with VA-backed loans and are more likely to approve applications and offer better interest rates.

The VA sets its own guidelines for the loan, including credit, income, and other requirements. The VA only guarantees up to 25% of the loan amount, so there’s still considerable risk for lenders with a VA-backed loan. Because of the risk, lenders set their own loan underwriting requirements, which you’ll need to meet to receive a loan and score a lower interest rate.

HOW TO GET THE BEST MORTGAGE RATE AS COMPETITION RISES AMONG LENDERS

What are VA cash-out refinance loan limits?

With a VA cash-out loan, homeowners can often borrow as much as 100% of the home’s appraised value. While the VA allows up to 100%, that doesn’t necessarily mean you’ll receive that much. Lenders set their own guidelines, too, typically more stringent than VA standards.

Let’s say you’ve paid off $50,000 on your current $200,000 home loan. You would have $50,000 in home equity built up. You could do a VA cash-out refinance up to $200,000 and receive $50,000 in cash to use as you wish.

If your home is appraised higher than your current home loan, you could be eligible to receive even more. If the value of your home has gone down, though, you’ll receive less.

By contrast, with a conventional cash-out refinance, lenders typically limit the total amount you can borrow to 80% of your home’s value. If you’re ready to look for a conventional cash-out refinance, you can easily compare rates from multiple lenders in minutes with Credible.

Who’s eligible for a VA cash-out refinance?

To be eligible for a VA cash-out refinance loan, you must:

• Live in the home you’re refinancing
• Meet VA lending requirements for active-duty service in a branch of the U.S. military
• Meet your lender’s requirements
• Qualify for a VA loan Certificate of Eligibility (COE)

To receive a VA cash out-refinance from a lender, you’ll need to provide them with a copy of your COE. Only qualifying military service members, National Guard, Reserves, and veterans are eligible for a COE.

To receive your COE, you must meet one of the following requirements:

• Served in the military for a minimum of 90 days (during wartime) or 181 days (during peacetime)
• Have six creditable years of service in the National Guard or Reserves, a minimum of 90 days of non-training active-duty service (National Guard or Reserves), or a minimum of 90 days of active-duty service, including at least 30 consecutive days (under Title 32)
• Be the surviving spouse of a service member who died in the line of duty, is missing in action, or being held as a prisoner of war

You may still qualify for a COE even if you don’t meet the minimum service time requirements. Service members who were discharged based on hardship, service-connected disability, or other acceptable reasons may still qualify for a Certificate of Eligibility.

What credit score do you need for a VA cash-out refinance?

While a low credit score can make it difficult to qualify for a conventional mortgage refinance, the VA doesn’t have a minimum credit score requirement for VA loans. Instead, the VA will require your lender to consider your entire financial profile when evaluating your loan application.

How much does a VA cash-out refinance cost?

One of the benefits of a VA cash-out refinance is that you can typically score lower interest rates than other loan types. Because the Department of Veteran Affairs backs the loan, lenders don’t face the same lending risks and can offer lower rates to homeowners seeking a refinance loan.

In addition to closing costs, most homeowners will pay a VA funding fee. This one-time fee helps to lower the cost of the loan for U.S taxpayers. How much you pay in fees depends on your borrower status:

• First-time use of VA benefits: 2.3%
• After first-time use: 3.6%

You can either pay the funding fee upfront during closing or roll it into your refinance loan. Keep in mind that if you roll the fee into your loan, you’ll pay interest on the fee amount.

Beyond the VA funding fee, homeowners pursuing a VA cash-out refinance may have to pay other closing costs, including:

• Origination fee
• Home appraisal fee
• Credit report fee
• Lender’s title insurance fee
• Discount points (if you want to reduce your interest rate)

Compare costs between various lenders before choosing the best fit for your needs.

LEARN ABOUT REFINANCING WITH NO CLOSING COSTS

How to apply for a VA cash-out refinance

The process to apply for a VA cash-out refinance loan is fairly straightforward.

1. Shop around for a lender

Private lenders, not the VA, fund VA cash-out loans. Shop around with various mortgage lenders, banks, and credit unions to see what they offer and find the best rates. Many lenders allow you to check rates before applying without negatively affecting your credit score. Pay close attention to lender fees and requirements to ensure you’re getting the best deal possible.

2. Request a Certificate of Eligibility

You’ll need to get your COE before applying for any VA loan. You can apply online directly through the Department of Veteran Affairs for a COE for a VA home loan.

3. Gather required documentation

Having documentation ready before you apply can help save time during the loan approval process. Each lender has different requirements, but it’s a good idea to have the following information on hand when you apply:

• Personal information
• Photo identification
• VA Certificate of Eligibility
• Military service records
• Current home loan information
• Most recent paycheck stubs for at least the past 30 days
• W-2 forms for the past two years
• Federal income tax returns for the past two years (required by many, but not all lenders)
• Home appraisal

Research what other information your lender requires before you apply for a loan. You’ll be better prepared for the process. Plus you’ll have a better understanding of your financial situation and what you need in a loan.

4. Apply for a loan

Many lenders allow you to apply online for home loans. Follow the lender’s guidelines for applying for a VA cash-out loan. Determine how much cash you want to borrow based on your need and what's available.

Decide whether you want to pay the VA funding fee during closing or if you want to roll it into the loan. You can often do the same with other closing costs as well. Provide all the necessary information as requested by your lender. Your lender will let you know how and when you’ll receive cash-out funds.

Pros and cons of a VA cash-out refinance

A VA cash-out refinance is an appealing option, especially if you want access to cash or to turn your non-VA loan into a VA loan. While it does have its advantages, a VA cash-out refinance also has some drawbacks to consider.

Pros

• You can potentially borrow up to 100% of your home’s appraised value.
• You can refinance a non-VA loan into a VA loan product.
• It provides cash to pay off debt or for other financial needs.
• It may be easier to qualify for a VA cash-out refinance with a low credit score.

Cons

• You’ll have to pay VA funding fees.
• You’ll be responsible for paying closing costs.
• You must meet lender and VA requirements to qualify.
• You’ll have to go through the entire underwriting process, including having your home appraised and applying for a VA-backed Certificate of Eligibility.

IS IT STILL A GOOD TIME TO REFINANCE A MORTGAGE?

Alternatives to a VA cash-out refinance

A VA cash-out refinance is a good choice for eligible homeowners, but it’s not the only option available. Here are some alternatives to consider if you’re looking to refinance your home loan or access liquid cash.

Interest rate reduction refinance loan

Also called a VA streamline refinance or VA IRRRL, this is another loan option only available for eligible military service members. It’s also only available for homeowners with a VA loan, so it’s not for those with a conventional or FHA loan.

Streamline refinance loans typically feature lower fixed interest rates and less documentation and underwriting than other loan types, including credit checks or home appraisals. Another difference is a lower VA funding fee — just 0.5%, which you can either pay in full at closing or include in your loan.

Conventional refinance

If you don’t qualify for VA-backed refinancing, you could apply for a conventional refinance loan. Depending on your credit score and history, and other factors, you could score a lower interest rate than your current loan.

Cash-out refinance

You could also pursue a conventional cash-out refinance if a VA cash-out refinance loan isn’t an option. The amount you can borrow depends on the lender’s requirements to qualify for a cash-out refinance.

Home equity line of credit (HELOC)

Another way to access cash is through a home equity line of credit. Although the interest rates can often be higher than other loan options, you don’t have to pay a VA funding fee.