What Is a VA Cash-Out Refinance Loan?

A VA cash-out refinance loan allows eligible veterans and service members to convert a portion of their home’s equity into cash. This loan provides access to home equity for various financial needs.

What a VA Cash-Out Refinance Is

A VA cash-out refinance replaces an existing mortgage with a new, larger loan backed by the Department of Veterans Affairs. Borrowers receive the difference between the new loan amount and the old mortgage balance in cash at closing.

This option is available regardless of whether the original mortgage was a VA, conventional, FHA, or USDA loan. Unlike a second mortgage or home equity line of credit (HELOC), a cash-out refinance replaces the entire existing mortgage.

Eligibility Requirements

To qualify for a VA cash-out refinance, applicants must satisfy specific service requirements. This includes active-duty service members, honorably discharged veterans, current members of the National Guard or Reserves with sufficient creditable service, and qualifying surviving spouses. The Department of Veterans Affairs requires a Certificate of Eligibility (COE) to confirm that an individual meets these service-related criteria.

Beyond service, borrowers must meet financial standards set by the VA and individual lenders. Lenders review credit history, often seeking a minimum credit score around 620. Debt-to-income (DTI) ratios are assessed, generally aiming for 41% or lower. Consistent income and a history of on-time mortgage payments for at least six months are also important. The property must be the borrower’s primary residence.

Key Features of the Loan

A VA cash-out refinance allows a loan-to-value (LTV) ratio of up to 100% of the home’s appraised value. While the VA permits this, many lenders cap the LTV at around 90%. This provides access to more equity compared to many conventional or FHA cash-out options, which often limit LTVs to 80%.

Interest rates for VA cash-out refinances are competitive and often lower than conventional cash-out loans, as the VA guarantees a portion of the loan, reducing lender risk. VA loans do not require monthly private mortgage insurance (PMI).

A one-time VA funding fee is required. This fee is a percentage of the loan amount and varies based on whether it is a first-time or subsequent use of the VA loan benefit, and the type of service. For a cash-out refinance, the fee ranges from 2.15% to 3.3% for first-time and subsequent users, respectively. Borrowers can roll this fee into the loan amount or pay it at closing. Exemptions from the funding fee apply to veterans receiving VA disability compensation, those entitled to receive it, Purple Heart recipients, and certain surviving spouses.

The Application and Closing Process

The process of obtaining a VA cash-out refinance begins by finding a VA-approved mortgage lender, as the VA does not directly originate loans but guarantees them. It is advisable to compare loan estimates from several lenders to identify the most favorable rates and terms. Once a lender is chosen, the application phase involves submitting various documents to verify eligibility and financial standing.

Required documentation includes:

• Certificate of Eligibility (COE)
• Recent pay stubs
• W-2 forms for the past two years
• Bank statements

A home appraisal is mandatory, determining the property’s current market value and confirming it meets the VA’s minimum property requirements (MPRs) for safety and habitability. This appraisal establishes the maximum loan amount.

After the application and appraisal, the loan moves into underwriting, where the lender reviews all submitted information to assess risk and make a final approval decision. The closing process involves signing legal documents to finalize the new mortgage. Closing costs, ranging from 3% to 5% of the loan amount, are incurred and may include fees for:

• Origination
• Title services
• Recording

These can be paid from the loan proceeds or rolled into the new loan balance.

Using the Refinance Proceeds

The cash from a VA cash-out refinance offers flexibility, as funds can be used for nearly any financial need. A common application is debt consolidation, allowing borrowers to pay off higher-interest debts like credit cards or personal loans. This can lead to lower monthly payments and reduced overall interest costs.

Homeowners also use the proceeds for home improvements or renovations, which can enhance property value and functionality. Other uses include funding educational expenses or covering unexpected medical bills.