Can You Get a Second Mortgage on a VA Loan?

A VA loan helps eligible service members, veterans, and surviving spouses achieve homeownership. As homeowners build equity, they may seek to access that value for financial needs like debt consolidation or home improvements. Understanding options for accessing home equity with an existing VA loan involves distinguishing between various loan products and their requirements.

Non-VA Second Mortgages

Homeowners with an existing VA loan can explore conventional second mortgages to access home equity. These include Home Equity Lines of Credit (HELOCs) and Home Equity Loans, which are not guaranteed by the Department of Veterans Affairs. Offered by conventional lenders, these loans exist as a separate lien behind the initial VA loan.

A Home Equity Loan provides a lump sum with a fixed interest rate and set repayment schedule. This structure offers predictability in monthly payments over the loan’s term. In contrast, a Home Equity Line of Credit (HELOC) functions as a revolving credit line, allowing borrowers to draw funds as needed up to a maximum limit during a specified draw period. HELOCs often come with variable interest rates, meaning monthly payments can fluctuate based on market conditions.

Conventional lenders assess several criteria when evaluating applications for these non-VA second mortgages. Lenders require borrowers to have a certain amount of equity in their home, often at least 15% to 20% of the home’s value. The loan-to-value (LTV) limits for these products mean the combined loan amounts (first VA mortgage plus the new second mortgage) commonly do not exceed 80% to 90% of the home’s appraised value.

Credit score expectations for a home equity loan or HELOC generally range from the mid-600s, with some lenders requiring at least a 620 FICO score. A higher credit score can result in more favorable interest rates and loan terms. Lenders also review the borrower’s debt-to-income (DTI) ratio, which compares total monthly debt payments to gross monthly income. This ratio is expected to be below 50%, with many lenders preferring it to be 43% or lower to ensure the borrower can manage additional debt.

These non-VA second mortgages are considered “subordinate liens” because they hold a lower priority position than the primary VA mortgage. In the event of a foreclosure, the primary mortgage lender is paid first from the proceeds of the home sale, followed by the subordinate lienholder. This increased risk for the second mortgage lender often leads to higher interest rates compared to a primary mortgage. Property type and occupancy requirements also apply, with lenders favoring owner-occupied primary residences.

VA Cash-Out Refinance

The VA Cash-Out Refinance is a specific VA-backed option for homeowners seeking to access their home’s equity. This refinance replaces the existing mortgage, whether it’s a VA loan or a conventional loan, with a new VA-guaranteed loan that allows the borrower to receive cash from their home’s equity. The cash received can be used for various purposes, such as debt consolidation or home improvements.

Eligibility for a VA Cash-Out Refinance requires meeting specific VA and lender criteria. Borrowers must possess a valid Certificate of Eligibility (COE), which verifies their service requirements for a VA loan. The property must be occupied as the borrower’s primary residence, or there must be a certified intent to occupy it. While the VA allows financing up to 100% of the home’s appraised value, many lenders cap the loan-to-value (LTV) at 90% in most cases.

A VA Funding Fee is a one-time charge paid to the Department of Veterans Affairs. For a VA Cash-Out Refinance, the funding fee is 2.15% of the loan amount for first-time VA loan users and 3.3% for those reusing their VA benefits. Veterans receiving VA disability income are exempt from paying this fee. This fee can be paid upfront at closing or rolled into the total loan amount, though financing it increases the loan balance and the total interest paid over time.

Lenders also evaluate credit scores and debt-to-income (DTI) ratios for a VA Cash-Out Refinance. While the VA does not set a strict minimum credit score, lenders commonly require a minimum score around 620. The DTI ratio is also assessed, with a general guideline often around 41%, though some borrowers with higher DTIs may still qualify if they meet VA residual income requirements or have compensating factors. A home appraisal is required to determine the property’s value, which impacts the maximum cash available.

Application and Closing Steps

Navigating the application and closing process for either a non-VA second mortgage or a VA Cash-Out Refinance involves several steps. Identifying lenders that offer the specific financing desired. For non-VA second mortgages like HELOCs or Home Equity Loans, conventional banks and credit unions are the typical providers, while VA-approved lenders handle VA Cash-Out Refinances. It is advisable to compare rates and terms from several lenders before proceeding.

Following lender selection, the process often begins with pre-qualification or pre-approval. Pre-qualification provides an estimate of how much a borrower might be able to borrow based on a preliminary review of financial information. Pre-approval involves a more thorough assessment, including a credit check and a review of financial documents, providing a conditional commitment for a loan amount. This step helps borrowers understand their borrowing capacity.

The formal application submission requires providing comprehensive financial documentation. This typically includes proof of income, such as recent pay stubs and W-2 forms. Self-employed individuals may need to provide tax returns and profit and loss statements. Asset statements, including bank account statements and investment account statements are also necessary to verify funds for closing costs and reserves.

After application submission, the loan moves into the appraisal and underwriting phases. The lender will order a home appraisal to determine the property’s current market value, which is crucial for calculating the maximum loan amount. Underwriting involves a thorough review of the borrower’s credit history, income, assets, and the property details to assess repayment ability and loan eligibility. The underwriter may request additional documents or clarifications during this review.

The final stage is the closing process, where all parties sign the necessary loan documents. Borrowers will review and sign the Closing Disclosure, which details the final loan terms, fees, and costs. Other documents signed include the promissory note and the mortgage or deed of trust, which grants the lender a lien on the property. Borrowers typically pay closing costs, which can range from 3% to 5% of the loan amount for a VA Cash-Out Refinance, and may include the VA funding fee. Funds are then disbursed, and the transaction is officially recorded.