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How a VA cash-out refinance works

Yahoo Personal Finance· Getty Images
Emily Guy Birken
6 min read

Homeowners who have served in the military and built up equity in their homes may be eligible for a VA cash-out refinance. This home refinance option allows you to qualify for a new VA-backed mortgage loan and cash out some of your equity as part of the new loan agreement.

To qualify for a VA cash-out refi, you must either already have a VA loan for your home or meet the military service requirements to replace your current conventional loan by refinancing into a VA loan. If you are interested in a VA cash-out refinance, here’s what you need to know.

Dig deeper: How soon can you refinance your mortgage?

In this article:

What is a VA cash-out refinance?

Who is eligible?

How much does a VA cash-out refi cost?

How to get a VA cash-out refi

FAQs

A VA loan cash-out refinance allows a homeowner to replace their current mortgage with a new loan with different terms. Typically, you will only refinance your mortgage if you qualify for better terms with a rate-and-term refinance or access equity in your home through a cash-out refinance.

If you choose a cash-out refinance, you take out a new home loan for a larger amount than your existing loan and then receive the difference in cash.

VA loans are offered by private mortgage lenders but backed by the U.S. Department of Veterans Affairs. This means lenders take on less risk and can offer lower mortgage rates than with conventional loans.

You can qualify for a VA cash-out refinance if you already have a VA loan. However, suppose you have a non-VA loan but meet the VA’s military service requirements to qualify for a VA loan. In that case, you might take a VA cash-out refi to take advantage of the lower interest rates or access equity in your home.

Learn more: 5 strategies to get the lowest mortgage rates

There are strict eligibility criteria for VA loans since they are limited to military service members. Specifically, only the following types of borrowers may be eligible for a VA cash-out refinance loan:

  • Military veterans

  • Active-duty military service members

  • Reservists and National Guard members called to active duty

  • Reservists and National Guard members who have performed six years of creditable service

  • Some surviving spouses

In all cases, military service members must meet the requirements for length of service and must have been discharged under any conditions other than dishonorable.

VA cash-out refinancing is available to any borrower who meets the military service requirements, whether or not they already have a VA mortgage for their home. However, a VA loan cash-out refinance is only available for a currently occupied primary residence. You cannot get a VA cash-out refinance for a second home or investment property.

Beyond the military service requirement, specific lending requirements will vary from one VA lender to the next. Most mortgage lenders have requirements for a minimum credit score, a minimum amount of home equity, an acceptable debt-to-income ratio (DTI), and proof of income.

Learn more: How loan-to-value ratio (LTV) impacts your mortgage

Though VA loans are typically less expensive than conventional loans, your VA-backed cash-out refinance will still have various costs. The specific loan terms, rates, and fees will vary depending on the lender. This is why it’s a good idea to get quotes from several mortgage lenders to find the right cash-out refinancing loan for your budget.

However, many VA borrowers will also have to pay the VA funding fee, which is similar to mortgage insurance. The fee amount depends on whether the loan is your first VA home loan, or if you’ve already had a VA loan before. The first time you get a VA loan, the VA funding fee is 1.25% to 2.15% of the amount borrowed, while it costs 1.25% to 3.3% for subsequent uses. The exact funding fee amount depends on the size of your down payment.

Read more: VA funding fee exemption — How it works and who qualifies

For example, let’s say you refinance with a loan amount of $250,000. If you originally purchased the home with a conventional mortgage but are now switching to a VA mortgage with a VA cash-out refinance, this will be considered your first use of a VA loan, and you will pay 1.25% to 2.15%, or $3,125 to $5,375. If you purchased the home with an existing VA loan, this is your second use, and you will pay a VA funding fee of up to 3.3%, or $8,250.

You may choose to pay the full VA funding fee as part of your closing costs, or you can roll the funding fee into your loan and pay it off over time.

Learn more: How a no-closing-cost refinance works

If you are interested in taking advantage of a VA cash-out refinance loan, you’ll need to follow these steps:

  1. Find a mortgage lender: VA loans are offered by private lenders, and you don’t have to refinance with the same company you used for your existing mortgage. Shopping around can help you find the best VA mortgage lender for your needs.

  2. Get a VA Certificate of Eligibility (CoE): This certificate indicates you are eligible for a VA loan. You can get your CoE through the VA’s website or your lender.

  3. Provide proof of income and other documentation: Your lender will require a number of documents as part of the loan process, including your most recent pay stubs, W-2 forms for the past two years, and IRS tax returns for the past two years.

  4. Close on your new loan: Be prepared to pay refinancing closing costs, including the VA funding fee and any other closing costs imposed by your lender.

Learn more: How a VA streamline refinance (VA IRRRL) works

Yes, the VA will guaranty a loan for up to 100% of the value of your home. For instance, if your home is valued at $300,000, you can get a cash-out refinance for the total loan amount of $300,000.

VA refinance closing costs vary by lender, but the funding fee is relatively easy to predict. Borrowers may need to pay a VA funding fee at closing for their VA cash-out refinancing loan. This fee is 1.25% to 2.15% of the loan amount the first time you use a VA loan and 1.25% to 3.3% for each subsequent use of a VA loan.

While the VA does not require a minimum credit score for refinancing, private lenders that service VA-backed loans will use your credit score to determine your interest rate. It’s common for lenders to require a minimum credit score of 620 for a VA cash-out refinance loan.

This article was edited by Laura Grace Tarpley