For those who are considering buying a home or already in the process, there is a dizzying array of options and things to consider. The government offers a multitude of different home loans, but they come with strings attached and buyers have to meet certain criteria to be eligible.
One such loan is the VA loan, which is a government-backed loan specifically for those who have served in the armed forces. If you’re not a current service member, a military veteran, or a surviving relative, you won’t have the option of applying for a VA loan.
If you are eligible, you’ll want to learn as much as you can about the U.S. Department of Veterans Affairs and the programs offered to assist individual veterans in purchasing or rehabilitating homes. More importantly, you’ll want to understand both your financing and refinancing options, especially if you’re looking to build equity in the home and later take advantage of a cash-out refinance.
What Are VA Loans?
We just mentioned the Department of Veterans Affairs, but let’s take a minute to understand its purpose and the VA loan process.
The VA Loan program has been touted as the most dynamic loan program on the market for service members, veterans, and military families. That’s because VA loans offer significant benefits that other government-backed loans don’t. They’re more flexible, require no down payment, or private mortgage insurance. They also feature extremely competitive rates and terms, allowing a qualified borrower to purchase a home with almost no money out of pocket.
There are two main loan ‘types’ from the VA. The first is a ‘direct home loan’, where the VA serves as the mortgage lender. The second is a ‘VA-backed home loan’, where the VA guarantees a portion of the loan from a private lender. There are also loan products designed specifically for Native American veterans, and for those with a current VA loan looking for an interest rate reduction. A cash-out refinance is one of the other subtypes of VA loans.
For any military member who doesn’t have a ton of savings or excess cash, knowing what you’re getting into with a VA loan can give you peace of mind and an understanding of how the finance process works now and should continue to work in the future.
The VA Cash-Out Refinance Loan
Despite what you may have heard, a cash-out refinance is not going to give you newfound wealth or produce money out of thin air.
At a certain point (well within the life cycle of owning a particular home), a VA-backed cash-out refi will let you replace your existing loan with a brand new one. The difference will be that your new loan amount will be for more than your old loan amount, and you’ll pocket the cash between those two numbers.
Let’s say you own a nice 2,000-square-foot, three-bedroom home worth $250,000 and you have a current mortgage principal of $175,000. You want a cash-out refinance (i.e. a new loan under different terms) and you’d like to walk away with $25,000 cash. Your new VA-backed loan would be for $200,000.
What you need to do next is find out if you’re eligible to refinance and learn how to apply for the VA’s Certificate of Eligibility.
According to NerdWallet, the Certificate of Eligibility tells a lender you meet the requirements to obtain a VA home loan. You can start looking for a home without one, but you can’t close on the home until the certificate is obtained. (In this case, you’ll need a certificate even for the refinance of an existing VA Loan. That’s because eligibility can be stripped away if you’ve been dishonorably discharged from the service or didn’t meet time-served requirements).
Why You’d Want to Pursue a VA Cash-Out Refinance
Military members looking into a cash-out refinance can use the money for a variety of different needs, such as making home improvements, paying off debt, handling emergencies, and more.
A VA-backed cash-out refi can also allow you to refinance a non-VA loan into a VA-backed loan.
Overall, this type of refinancing is available to any qualified veteran homeowner, regardless of whether their original loan is through the Federal Housing Administration (FHA), the U.S. Department of Agriculture (the USADA) or via a conventional loan.
Like other VA loans, cash-out guidelines require no mortgage insurance. It’s also the only refinance option available (when compared to any other loan type) that allows the borrower a loan-to-value ratio (LTV) of 100 percent. This is incredibly important, as the LTV is typically a barometer of risk assessment that the lender will use before approving a loan.
The one thing you shouldn’t do is to confuse LTV with your debt-to-income ratio. That’s because VA lenders usually allow a debt-to-income ratio of up to 41 percent. This means they’ll take all your monthly debts into consideration when packaging your cash-out refinance, including your new home payment, and any car payments, student loans and other outstanding debt. When you add all these numbers together, it can’t exceed 41 percent of your before-tax monthly income.
VA Cash-Out Refinance Eligibility
You might be eligible for a cash-out refinance if you meet the requirements set forth by the VA. In order to qualify, you:
– Must have obtained the VA home loan certificate of eligibility (proving, among other things, that you meet the minimum active-duty service requirement).
– Must meet the VA’s – and your lenders – criteria for income and credit.
– Must live in the home you’re refinancing.
The quickest (and perhaps easiest) way to move through this process is by using a VA-approved lender. That’s because most of them can issue a Certificate of Eligibility immediately if there’s already sufficient information in the VA’s database that proves your worthiness.
If you don’t meet the minimum requirements, all hope is not lost. You can still qualify if you were discharged from the military due to things like a hardship, obtaining an early out, if you were part of a reduction in force, or had a service-connected disability or medical condition.
Final Thoughts on VA Cash-Out Refinance
The true cost of a VA loan comes in the funding fee, which is applied to every single VA purchased or refinanced loan. There’s also no way around paying it, as the fee goes to the Department of Veterans Affairs to help cover losses and keep the loan programs running.
The funding fee can change depending on a number of factors, including the type of loan you’re looking for (such as a cash-out refinance), whether you’re making a down payment, and whether you’ve already used your VA loan benefit before.
The good news is that veterans going through a VA refinance can opt to pay the fee out of pocket or finance it over the life of the loan.
If you have more questions about VA loan cash-out refinancing, it’s best to talk with a VA loan specialist. He or she can help guide you through the process and help you take advantage of all the benefits found in a VA refinance.
- VA home loan types, U.S. Department of Veterans Affairs. Accessed at https://www.va.gov/housing-assistance/home-loans/loan-types/
- Your Complete Guide to the VA Home Loan, Veterans United. Accessed at https://www.veteransunited.com/va-loans/
- How to Get a Certificate of Eligibility for a VA Home Loan, Nerd Wallet. Accessed at https://www.nerdwallet.com/blog/mortgages/get-certificate-of-eligibility-va-home-loan/
- VA Cash-Out Requirements, The Mortgage Reports. Accessed at https://themortgagereports.com/24616/va-cash-out-refinance-guidelines-requirements-mortgage-rates#mi