VA Cash-Out Refinance Definition and Guidelines
What is a VA Cash-Out Refinance Loan?
A VA cash-out refinance loan is very similar to a conventional cash-out refinance loan. A VA cash-out refinance is a VA-backed loan that replaces your original home loan with a larger VA-backed loan based on the equity your home has collected over the years.
Equity is the amount of a home’s value that has been paid off. Homeowners gain equity through paying down the principal of their mortgage with their monthly mortgage payments, or through the value of their home increasing over time.
You can use a VA cash-out refinance to replace a VA loan or a mortgage loan that is not backed by the VA, like a conventional or FHA loan.
How Do I Get a Cash-Out Refinance Loan?
The process for applying for a VA cash-out refinance is very similar to applying for a home purchase. The first step is to acquire your Certificate of Eligibility (COE) from the Department of Veterans Affairs. This document verifies that you are in fact eligible for a VA loan. You can retrieve your COE online or by mail. Typically, a VA-approved lender can retrieve your COE for you as well.
Be sure to research multiple VA-approved lenders and shop around until you find a lender that suits your needs and goals. Different lenders will have different requirements and some will have more competitive lower interest rates, so it is really important that you shop around until you find the best one.
Once you are pre-approved, you will work with a loan officer to get your loan application approved and get all the documentation necessary for closing.
Who Qualifies For a VA Cash-Out Refinance?
Qualifying Veterans, Servicemen, and Survivors can qualify for a VA cash-out refinance. For VA-backed loans, the general service requirements include:
- A minimum of 181 days during peacetime or 90 days during wartime
- 6 years of creditable service in the Reserves or National Guard or 90 days under Title 32, with at least 30 being consecutive
- Minimum service time requirements are waived if you were discharged for a service-connected disability
- Surviving spouse of a service member who died in the line of duty and did not remarry or remarried after you were 57 years old.
- Spouse of a Veteran missing in action or a prisoner of war.
There are additional requirements you will have to meet based on your lender. These requirements will vary, but typically include your credit score, debt-to-income ratio (DTI), and assets.
Every lender has its own requirements for who qualifies for a cash-out refinance. It is important to shop around and contact a variety of lenders before choosing your lender because different lenders may have more lenient requirements or better mortgage rates. Lenders will review your credit score, debt-to-income ratio (DTI), and the equity in your home to determine your eligibility.
When Can I Refinance My Home?
You typically have to wait at least six months after purchasing your home to refinance it. You also will need to have at least 20% equity in your home. This means you will need at least 20% of the principal of your home paid off or your home needs to have appreciated at least 20% in market value. Homes can appreciate in value due to inflation in the housing market or due to improvements on the home.
How Much Cash Can I Get From a Cash-Out Refinance?
You can get a cash-out refinance mortgage loan for up to 80% of your home’s value. The majority of this will go toward paying off your mortgage. The difference between your second loan and your original mortgage is the cash you take home. Let’s crunch some numbers as a hypothetical example.
Let’s say you purchased your home in 2018 for $225,000. Since then, the value of your home has appreciated 40% due to the amount of your mortgage you have paid off, home improvements you have made on your house, and the amount your home has appreciated in value. This means your home’s value has appreciated $90,000 and is now valued at $315,000.
Using a cash-out refinance loan, you refinance your home with a loan equivalent to 80% of its current value, which would be $252,000 (315,000 X 0.8).
The difference between $252,000 and $225,000 is $27,000. This means that you would get $27,000 in cash from refinancing your mortgage using a cash-out refinance. It’s important to note that there are closing costs as well in a cash-out refinance, but these are usually shared with the seller and amount to 2.3% to 5% of the overall loan amount.
How to Prepare For a VA Cash-Out Refinance
Preparing for a VA cash-out refinance is very similar to preparing for a VA home purchase. You will need to retrieve a COE (certificate of eligibility) from the VA as well as other documentation verifying your income, assets, employment, and identity. You will need to find a VA-approved lender and submit your loan application through them. You will also want to prepare your finances, review your credit score and your debt-to-income ratio, and pay off any debts or collections that are harming your credit score.
Contact a Loan Specialist
Interested in refinancing your home with a VA-backed cash-out refinance loan? Contact a loan specialist today at VeteransLoans.com to determine your eligibility and get pre-qualified in a matter of minutes.