Marcus Marion, CMA™ VA loans offer a lot of benefits for home buyers, such as the ability to buy a house with no down payment. But current homeowners can take advantage of this program as well.
For instance, the VA cash-out refinance loan allows eligible homeowners (military members and veterans) to convert some of their home equity into cash. These funds can be used for everything from home renovations to starting a business.
In this guide, we will answer some of the most frequently asked questions relating to the VA cash-out refinancing program, and how it could benefit you as a homeowner.
1. What is a VA cash-out refinance loan?
As its name suggests, a VA cash-out refinance loan allows eligible homeowners to convert some of their home equity into cash. These loans are backed by the U.S. Department of Veterans Affairs. The program is limited to qualifying military members and veterans.
Borrowers can use the cash generated through a cash-out refinance for many purposes. Common uses include home improvements, debt consolidation, college tuition, or other major expenses. There’s no restriction as to how you can use the money.
2. How does it differ from regular refinancing?
While regular refinancing replaces your existing mortgage with a new one, a VA cash-out refinance does the same but goes a step further. It allows you to borrow more than what you owe on your current mortgage, resulting in cash proceeds at closing.
3. How does it benefit the homeowner / borrower?
Depending on the situation, VA cash-out refinancing can have one major benefit, or multiple benefits. In all cases, the homeowner benefits by converting some of their home equity into usable cash.
Other potential benefits include:
A lower interest rate. If the interest rate on your existing home loan is higher than today’s market rates, you might also be able to refinance into a lower rate. This in turn could reduce the size of your monthly payments, saving you money going forward.
Eliminating mortgage insurance. If you currently have a conventional mortgage loan with private mortgage insurance (PMI), refinancing into a VA loan would essentially eliminate your PMI policy. That’s because the VA program does not require any form of mortgage insurance.
4. Who is eligible for a VA cash-out refinance?
In short, if you’re eligible for a standard VA purchase loan, you’re probably eligible for the cash-out refinance program as well.
As you know, VA-backed mortgage loans are limited to military members, veterans, and certain qualifying spouses. The program is offered through the U.S. Department of Veterans Affairs.
Generally speaking, the following groups are eligible:
- Active-duty military who have served for at least 90 days
- National Guard and Reserve members who have completed at least six years of regular service or 90 days of active duty
- Surviving spouse of a military person who died in the service or due to a service-related disability
Additionally, you must have sufficient equity in your home to qualify for a VA cash-out refinance. This program allows you to convert some of your equity into cash, so you have to have something to work with.
5. What is equity, and how does it affect the loan amount?
Equity refers to the portion of your property that you truly own. It’s the current market value of your home minus the outstanding mortgage balance or other liens.
The VA typically allows eligible homeowners to access up to 100% of the appraised value of their home minus the existing mortgage balance.
As it states in the official VA handbook for mortgage lenders: “The maximum [cash-out refinance] loan amount is 100 percent of the appraised value, plus the cost of any energy efficiency improvements, plus the VA funding fee.”
So, the greater your equity, the more cash you can potentially access.
6. Are there any fees for a cash-out refinance?
Funding fees are required for nearly all VA-guaranteed home loans, and that includes cash-out refinancing. The funding fee amount depends on whether it’s your first time using the program, or a subsequent use. For most homeowners, these fees range from 2.3% for first-time use up to 3.6% for subsequent use.
7. How does the process work?
The VA cash-out refinancing process can vary slightly from one borrower to the next, due to a number of factors. Here are some of the most important steps.
- Get Your COE: You will need to obtain a “Certificate of Eligibility” from the Department of Veterans Affairs. This document shows your lender that you’re eligible for the program.
- Submit Documents: Your lender might require additional documents for underwriting purposes. This could include paycheck stubs for the most recent 30-day period, W-2 forms for the previous two years, and federal tax returns for the previous two years.
- Home Appraisal: The lender will order an appraisal of your home to determine its current market value. This step is crucial because it affects the amount of cash you can receive through a VA cash-out refinance.
- Underwriting and Approval: The lender will review your application, documentation, and appraisal to determine if you qualify for the VA cash-out refinance loan.
- Receive Funds: After closing, the funds from the cash-out refinance will be disbursed. You can use these funds for various purposes, such as home improvements, debt consolidation, or other financial needs.
- Make Payments: A VA cash-out refinance replaces your existing mortgage with a new loan. So you’ll need to make timely payments on the new loan to avoid default and to sustain home equity growth going forward.
As you can see, homeowners with VA loans continue to benefit from the program even after making the initial home purchase. The cash-out refinance loan is just one of those benefits.
