Can You Get a HELOC on Your VA Loan?

Home equity is the portion of your home you own outright, calculated by subtracting your mortgage balance from its current market value. This equity can be a valuable financial resource for homeowners, funding significant expenses or consolidating debt. Veterans, who benefit from VA loans, often consider how to access this accumulated equity. Understanding the mechanisms for leveraging home equity, especially with a VA loan, is important for these homeowners.

Understanding VA Loan Restrictions for Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against their home’s equity, providing a revolving credit line. However, direct HELOCs cannot be taken out on an existing VA loan. This limitation stems from the protective structure of the VA loan program. VA loans are designed as first-lien mortgages, holding the primary claim on the property.

The Department of Veterans Affairs (VA) guarantees these loans, prioritizing the security of that guarantee. Placing a second lien, like a HELOC, directly behind a VA first mortgage is not permitted without a full refinance of the original VA loan. Junior liens can complicate the VA’s guarantee in a default or foreclosure. The program’s design protects the veteran and the loan guarantee by maintaining the VA loan’s primary position.

VA Cash-Out Refinance as an Alternative

For veterans seeking to access home equity while retaining VA loan benefits, the VA Cash-Out Refinance is the primary VA-specific method. This refinance allows you to convert home equity into cash by replacing your existing mortgage with a new, higher VA-backed mortgage. The difference between the new loan amount and the old loan payoff, less closing costs, is then disbursed as cash.

To be eligible, veterans need sufficient home equity; the VA allows up to 100% loan-to-value (LTV) on the new loan, though many lenders cap this at 90%. Lenders review credit scores, typically requiring a minimum FICO score of 620, though some may accept as low as 580. Debt-to-income (DTI) ratios are also assessed, often looking for a ratio around 41%.

Before applying, veterans should gather key documents. These include income verification (e.g., pay stubs, W-2s) and asset statements (e.g., bank accounts, investment portfolios). You will also need existing mortgage statements and your VA Certificate of Eligibility (COE), which confirms your VA loan benefit. The COE can often be obtained through your lender or the VA’s eBenefits portal.

The VA Cash-Out Refinance application process begins by finding a VA-approved lender. After submitting documentation, the lender orders an appraisal to determine your home’s market value and available equity. The loan then proceeds to underwriting, where information is verified and risk assessed. At closing, the new VA loan replaces your old mortgage, and cash proceeds are disbursed. VA cash-out refinance closing costs are typically 3% to 5% of the loan amount, though the VA limits what lenders can charge.

Non-VA Loan Options for Home Equity Access

Homeowners with a VA loan can access equity through non-VA loan options, typically by refinancing out of their existing VA mortgage. One approach is to refinance the VA loan into a conventional loan, allowing for a conventional home equity loan or HELOC as a second mortgage. Eligibility for conventional products depends on factors like credit score, often requiring a FICO score of at least 620, with many lenders preferring 680 or higher for HELOCs. Debt-to-income ratios are also a factor, with lenders typically looking for a DTI below 43-50%. Lenders consider loan-to-value limits, often requiring at least 15-20% equity for a second mortgage, with maximum LTVs for conventional cash-out refinances typically around 80%.

For these conventional options, you typically provide documentation similar to a purchase loan, including income verification, bank statements, and credit history. An FHA Cash-Out Refinance is another government-backed alternative, replacing an existing VA loan or any other mortgage type. An FHA cash-out refinance allows borrowing up to 80% of your home’s appraised value. While the FHA allows credit scores as low as 500, most lenders require a minimum FICO score between 580 and 620 for cash-out refinances. A debt-to-income ratio generally below 43% is sought, though some lenders may allow up to 50% with compensating factors.

The procedural steps for obtaining these non-VA loans involve finding a lender offering conventional or FHA refinancing and home equity products. After applying and submitting documentation, the lender conducts an appraisal to determine the home’s value and assess available equity. The application then moves through underwriting, where financial and property details are reviewed for approval. Upon successful underwriting, the loan proceeds to closing, finalizing the new conventional or FHA loan and providing any cash-out funds. Switching from a VA loan to a conventional or FHA loan means foregoing unique VA loan benefits, like no down payment or ongoing mortgage insurance, but provides access to a wider range of home equity products.