VA Cash Out Refinance Guidelines | Everything You Need to Know

Last Updated on September 19, 2024 by Luke Feldbrugge

The VA cash-out refinance program has some good news for you. You can get cash by refinancing your home through the VA loan system. The better news is that you can do that even if your current mortgage is not a VA loan – as long as you meet the VA eligibility standards of being a veteran, an armed forces service member, or the surviving spouse of an active duty or former service member.

The VA Cash-Out Refinance program is one of many loan programs sponsored by the Department of Veterans Affairs.

They include:

1. The VA-Backed Home Loan (this is the traditional VA Loan you always hear about)
2. The Native American Direct Loan
3. The VA Interest Rate Reduction Refinance Loan (IRRRL)
4. The VA Cash-Out Refinance Loan

Each one is particularly useful in the right situation. The VA cash-out refinance loan is useful if you need cash to fix up or renovate your current home. It can also be used for any number of needs including medical bills, education or just getting yourself back on your feet financially.

What is a VA Cash-Out Refinance?

This is a way to tap into the equity of your home and get a loan based on your home’s equity. You essentially create a new mortgage for your home, often with similar interest rates, and turn your equity into cash that you can use. If, for example, you have paid down about $50,000 of your mortgage over time, you can turn that equity into a payment to you (minus closing costs).

If the equity of your home has gone up (i.e. your home’s current value is $250,000 instead of $200,000), that extra equity from the increase in the value of your house can also increase the amount you can cash-out. As always, work with a professional mortgage specialist when figuring out exactly how much equity you have and how much cash you can get.

The VA-version of the cash-out means that your mortgage refinancing will be guaranteed and insured by the U.S. Department of Veterans Affairs. For the private lender that is actually giving you the money, that means they take less risk and have more confidence in the loan they are giving you. Unlike other VA programs, however, your original mortgage does not need to be a current VA loan. As long as you qualify for the VA Cash-Out loan by being an active duty military service member or a veteran, you can use this program. Qualifying for the VA program usually means going through the Certificate of Eligibility (COE) application process. This ability to switch from a non-VA loan to a VA loan has benefits to you, the borrower.

Benefits

1. Borrow Against Full Value of Home – Due to recent changes in the VA Cash Out Refi program, you can now borrow against the full value of your home. There are no upper limits and you can get 100% of your home’s value. In the past the VA had a maximum cap on how much you could cash out. Again, your private lender may have different requirements when it comes time to actually give you the loan and cash, but the VA’s rules are very generous in this case.
2. Homes for Heroes Savings – When you work with Homes for Heroes by signing up on our site, we connect you with our local mortgage specialist who is knowledgeable regarding the VA cash out refinance and the recent changes. They are dedicated to helping military members get the refinance loan they’re looking for; including but not limited to a VA cash out refinance loan and saving them money in the process.
3. No Down Payment – As with many VA loan programs, there is no down payment for your cash-out refinance. Moreover, when you convert a non-VA loan to a VA loan, you won’t have to pay mortgage insurance payments every month. For an average home, that can add up to hundreds of dollars of savings every month.
4. Lower Rate, Lower Payments – If you are going from a conventional loan to a VA loan, you can typically get a lower interest rate and better loan terms on your refinanced mortgage. If that’s the case, you could potentially be paying lower interest on the life of your loan as well as lower monthly mortgage payments.

If you are a military service member or veteran, these cash-out refinancing arrangements are worth a look.

Drawbacks

While the benefits of this program are substantial, there are a few drawbacks. Qualifying for VA benefits is typically an involved process. In another loan program (the VA IRRRL) the loan is a VA streamline refinance, but this one is not.

1. Funding Fee – You will need to pay the VA cash out refinance funding fee, a one-time fee that is typically about 2.3% of the loan amount for a new VA loan (or 3.6% if this isn’t your first VA loan). The VA funding fee is usually waived if you were awarded the Purple Heart or you have a service-related disability. Depending on your lender, you can roll this fee into your loan, but it will reduce the amount of cash you get back.
2. Full Underwriting Process – You will go through the full underwriting process with your lender for a cash-out refinance. That means income statements, tax returns, the COE, and maybe more.
3. Other Fees – There are a series of fees associated with closing on this kind of refinance:
   • Origination fees
   • Appraisal fees
   • Credit Report fees
   • Lender’s title insurance fees
   • Discount points (when applicable)

Lenders are more careful about cash-out refinances, and you should be too. They don’t want their borrowers simply cashing out to spend the cash-out funds on frivolous stuff, and neither does the VA. That happened a lot during the last housing bust (2008-2009) and they don’t want to repeat those mistakes.

If you are using the money for home improvements, energy efficient changes, education, medical emergencies and other necessities, that’s acceptable. Trips and luxury items are not a good idea for this kind of loan.

VA Cash Out Refinance Guidelines

We already talked about the primary guideline: qualifying for the VA loan program. Since this is not a streamlined process, you will need to gather all the documents needed by your mortgage broker. Your loan officer will give you a list.

You will also need:

• A credit score of between 580 and 620
• Stable employment and income
• At debt-to-income ratio under 41%
• Sufficient equity in your home

In addition to these requirements, you also need to certify that you will be living in the home that you are refinancing.

Homes for Heroes Can Help

One of the common denominators in the discussions of the VA Cash-Out Refinance Loan is the importance of the lender. In most cases, the VA guarantees loans but private companies actually make the loan or grant the mortgage. Even if the VA approves of aspects of the loan process (such as your credit score) your private lender will have the final say. They are the decider when it comes down to actually giving you the loan.

Homes for Heroes looks for, and signs up, mortgage lenders that agree with our mission to help and thank military service members and eligible veterans. In that way, we can connect you with our local mortgage specialist who understands the ins and outs of refinancing as well as the VA loan processes.