What Is a VA Cash-Out Loan and How Does It Work?
Unlock your home's equity with a VA cash-out loan. Discover how this refinancing option can provide financial flexibility for eligible veterans and service members.
A VA cash-out loan allows eligible homeowners to access their home equity. This refinancing option replaces an existing mortgage with a new one, providing borrowers a portion of their home equity as a lump sum of cash at closing.
Understanding VA Cash-Out Loans
A VA cash-out loan is a mortgage refinance backed by the U.S. Department of Veterans Affairs. It allows qualified individuals to convert home equity into liquid funds. Unlike a second mortgage or a home equity line of credit (HELOC), this loan replaces the borrower’s current mortgage with a new, larger VA-guaranteed mortgage. The difference between the new loan amount and the existing balance is provided to the borrower as cash.
Funds from a VA cash-out refinance can be used for various financial needs. Common uses include debt consolidation, such as paying off high-interest credit cards, and home improvements that can increase property value. The cash can also cover major expenses like medical bills or educational costs.
Eligibility Requirements
To qualify for a VA cash-out loan, individuals must meet military service requirements. This includes veterans, active-duty service members, National Guard or Reserve members, and certain surviving spouses. Eligibility is confirmed through a Certificate of Eligibility (COE).
The property must be the borrower’s primary residence. The VA loan program supports homeownership for eligible individuals, not investment properties or second homes.
Lenders assess the applicant’s financial health, including creditworthiness and income stability. While the VA does not set a minimum credit score, most lenders look for a score of 620 or higher. Borrowers must demonstrate sufficient income to repay the new mortgage. Lenders review financial documents like pay stubs, W2s, and tax returns to verify income and assess the debt-to-income ratio.
Key Loan Features and Costs
The maximum loan amount for a VA cash-out refinance is determined by the home’s appraised value and loan-to-value (LTV) ratio. Unlike many conventional cash-out refinances that limit borrowing to 80% of the home’s value, VA cash-out loans can allow access up to 100% of the appraised value. However, many lenders may cap the LTV at 90%.
Interest rates for VA cash-out loans are competitive and often lower than conventional options due to government backing. Borrowers can choose between a fixed-rate mortgage or an adjustable-rate mortgage (ARM). The specific rate depends on market conditions, credit score, and debt burden.
A mandatory VA funding fee, a percentage of the loan amount, is paid directly to the VA. This fee helps offset program costs and reduces lender risk. For a VA cash-out refinance, the funding fee is 2.15% for first-time VA loan users and 3.3% for those reusing benefits. This fee can often be financed into the loan. Veterans receiving VA compensation for a service-related disability, or surviving spouses receiving Dependency and Indemnity Compensation (DIC), are generally exempt.
Borrowers also incur other closing costs, similar to any mortgage transaction. These may include appraisal fees, title insurance, origination fees, and recording fees. These costs are typically due at closing.
The Application Process
The VA cash-out loan application process begins with finding a VA-approved lender. Selecting a lender with experience in these products is beneficial. After choosing a lender, obtaining pre-approval provides an estimate of the qualified loan amount.
Throughout the application, borrowers provide various documents. This includes the Certificate of Eligibility (COE), confirming VA loan entitlement, and income verification documents like pay stubs, W2s, and tax returns. Bank statements are also required to show financial stability and assets. Statements from the existing mortgage are needed for refinancing.
A key step is the VA appraisal, conducted by a VA-approved appraiser to determine the home’s market value. This appraisal ensures the property meets VA minimum requirements and establishes the loan amount basis. After the appraisal, the loan moves into underwriting, where the lender reviews all documentation, including credit history, income, and the appraisal report, to assess risk and make a final lending decision.
The final stage is closing, where all parties sign the necessary loan documents. This includes the new mortgage note, outlining the loan terms, and other legal paperwork. Once documents are signed and funds disbursed, the loan is funded, and the cash-out portion is provided to the borrower. The process length varies but involves thorough review.