What happens when you miss a mortgage payment?

Quick insights

• VA cash-out refinances replace current loans with new mortgages. They can be used to access home equity or change a non-VA mortgage into one that’s VA-backed.
• VA cash-out refinance underwriting requirements are generally the same as those for VA purchase loans.ec-va-lender-pdf
• With a VA cash-out refinance loan, you can borrow up to 100% of the property’s reasonable value.ec-va-refi-loans However, your lender may cap what you can borrow.

A VA-backed cash-out refinancerefinance-hl000061 will replace your current loan with a new one backed by the U.S. Department of Veterans Affairs (VA). The refinance can be used either by current VA loan holders looking to tap into their home equity or by non-VA mortgage holders wanting to convert their loan into one backed by the VA.

What is a VA cash-out refinance?

A VA cash-out refinancing loan is a refinance of an existing mortgage(s) and/or other debts secured by a lien.ec-va-refi-loans Refinancing loans made on properties without existing mortgages or liens aren’t eligible for guarantee by the VA.ec-va-refi-loans A lien is a legal right acquired on one’s property by a creditor or lienholder.ec-law-cornell-lien

In other words, there must be a loan on your property to potentially qualify for a VA cash-out refinance. You can’t apply for one if the home is paid off.

There are two distinct types of VA cash-out refinance loans: Type I and Type II.ec-va-refi-loans

Type I VA cash-out refi

A VA cash-out refinance is classified as a Type I cash-out refinance if the new loan amount doesn’t exceed the payoff amount of the loan being refinancedec-va-refi-loans—in other words, if you don’t take equity to use as cash.

You may be wondering why this is still considered a cash-out refinance. It’s because “cash-out” refers to the loan structure, not the borrower’s intent. Under VA guidelines, cash-out refinances must be fully underwritten, and the original loan doesn’t have to be backed by the VA.ec-va-refi-loans

Type II VA cash-out refi

A Type II cash-out refinance is when the new loan amount exceeds the old loan amount. It also allows equity to be used as cash. For example, if you wanted to take out equity to use for renovations or home improvements, you’d apply for a Type II VA cash-out refinance.

VA cash-out refinance requirements

Generally, the underwriting requirements for VA cash-out refinance loans are the same as for VA purchase loans.ec-law-cornell-lien Below is an overview of the most important criteria lenders will review.

Certificate of eligibility

To apply for a VA cash-out refinance, the borrower must meet the service requirements to receive a Certificate of Eligibility (COE). If you’re unsure if you meet the requirements, you can check the VA.gov website for more details.

Credit score

The VA doesn’t require a minimum credit score to be approved for a VA cash-out refinance. However, your application must still go through underwriting so your lender can decide whether or not you’re a satisfactory credit risk. Talk to your lender for more specifics about their credit score requirements, as they vary by lender.ec-va-lender-pdf

Debt-to-income ratio

Your lender will review your debt-to-income (DTI) ratio as part of the application process. This is one of the most important factors underwriters will review. The target DTI for VA loan underwriting approval is 41% or less. However, it may still be possible to qualify with a higher DTI ratio if you provide your lender with acceptable compensating factors.ec-ecfr-title-38

Seasoning requirement

If you’re refinancing a non-VA loan into a VA cash-out refinance, there are no seasoning requirements for you to meet. However, if you’re refinancing a VA-backed loan, there are a few that apply.ec-va-refi-loans

If you’re refinancing within one year of the original loan closing date, you must wait at least 210 days from the date you made your first payment. This applies to both VA cash-out refinance types.ec-va-refi-loans You must also meet another condition that varies slightly depending on which VA cash-out refinance you’re applying for:

• If applying for Type I: You must have made six consecutive monthly payments.ec-va-refi-loans
• If applying for Type II: You must have made six monthly payments. They don’t have to be consecutive.ec-va-refi-loans

Closing costs

To qualify for a VA cash-out refinance, the borrower must have the cash assets or equity necessary to cover closing costs on the loan.ec-va-lender-pdf This includes the VA funding fee if the borrower doesn’t plan to roll it into the loan.

How much can you borrow with a VA home loan cash-out refinance?

There isn’t a fixed maximum dollar amount for VA-backed loans. However, VA cash-out refinance loans are limited to 100% of the VA reasonable value.ec-va-refi-loans The VA considers reasonable value to be synonymous with market value, which will be determined through appraisal.ec-lender-va-pam

However, even though the VA allows cash-out refinances for 100% of the property’s reasonable value, some lenders may cap that depending on your credit score. Speak to your lender to find out if they do so.

Are there restrictions on what you can use the cash for?

No. The VA doesn’t restrict how veterans can use the funds they receive from a VA cash-out refinance. The lender handbook states the cash may be used “for any purpose.”ec-va-refi-loans However, remember that the VA loan must be made on your primary residence with the expectation it will remain your primary residence after closing for a reasonable time.

Should you consider a VA cash-out refinance?

Whether or not a VA cash-out refinancing is right for you is a personal decision that depends on your unique financial circumstances. That said, here are some general pros and cons worth considering.

Pros

• There are no official restrictions on how borrowers can use the cash, which grants maximum spending freedom.
• You may be able to borrow up to 100% of the property’s reasonable value.
• Borrowers have the flexibility to refinance non-VA loans, which could get rid of costs that don’t apply to VA-backed loans, like private mortgage insurance (PMI).

Cons

• Borrowers must complete the full underwriting process.
• You’ll need to pay closing costs, including the VA funding fee, although that portion can be rolled into the loan.
• Because you can borrow up to 100% of your reasonable value, if home prices drop, you could end up underwater on your mortgage.

How to apply for a VA cash-out refinance

If you’d like to apply for a VA cash-out refinance, here are some potential next steps.

• Secure your COE: If you don’t already have one, you can request it through the VA.gov website or ask your lender to assist.
• Shop lenders: Keep in mind that you don’t necessarily need to use the same lender that issued your current loan. It can be worthwhile to shop around and see what different lenders can offer you.
• Review requirements: Once you’ve decided on a lender, it can be a good idea to talk through the loan requirements with them. They can answer any questions you may have and provide you with guidance if there’s a specific area you’re concerned about.
• Apply for the loan: Once you’ve completed these steps, you’re ready to apply. Your lender will review your application for the VA cash-out refinance. If you’re approved, you’ll need to pay closing costs to complete the process.

In summary

VA cash-out refinances can be enticing depending on your goals. If you’re interested in pursuing this option, it can be worthwhile to talk to multiple lenders and get a sense of what they offer. Remember, you don’t necessarily have to refinance with the same lender that issued the purchase loan.