VA Cash-Out Refinance: What It Is And How It Works

For homeowners with a Department of Veterans Affairs (VA) mortgage loan, the VA also offers cash-out refinance loans. This refinance – or refi – can allow you to tap your home equity so you can pay for home renovations, consolidate debt, or just have some extra cash on-hand.

What Is A VA Cash-Out Refinance?

A VA cash-out refinance allows veterans, active-duty service members, and surviving spouses who qualify to get a loan for up to 100% of the appraised value of their home.

Loans obtained with the VA program can be used to:

• Pay off liens and debt
• Make home improvements
• Refinance a non-VA loan into a VA loan (which often comes with better terms than a conventional loan)

A VA cash-out refinance essentially replaces your mortgage with a government-backed loan, converting home equity into cash to pay off other expenses.

Are There Limitations To What You Can Spend The Cash On?

The money from a VA cash-out refinance can be used for nearly anything that people can legally use money for. Some of the most common usages are:

• Home improvement and remodeling
• High-interest debt payment for credit cards and personal loans
• College or graduate school tuition and fees
• Medical or hospital bills
• Investments such as a rental property or a business start-up

Be aware that a VA cash-out refinance does not happen overnight. It probably won’t be an option for immediate emergency expenses, but it is a low-interest option to pay off high-interest debt from such emergencies after the fact.

How Does A VA Cash-Out Refinance Work?

Since VA loans are backed by the federal government, these and other government loans present lower overall risk to lenders.

How Do You Apply For A VA Cash-Out Refinance?

The process of applying for a VA cash-out loan is similar to that of applying for a conventional loan. The process typically involves the following steps:

1. Research VA lenders
2. Review loan conditions
3. Select a financial institution to work with
4. Submit a loan application

Who Is Eligible For A VA Cash-Out Refinance?

Current active-duty service members, veterans, and qualifying surviving spouses may be eligible.

But you don’t need to have an existing VA loan to access the program. It’s possible to access funding for a VA cash-out loan regardless of your mortgage type. This applies whether it’s a 15-year or 30-year fixed-rate loan or an adjustable-rate mortgage (ARM).

Let’s take a closer look at eligibility requirements.

Service Requirements

To satisfy the minimum requirements necessary to obtain a VA loan, applicants must have:

• Served on active military service duty for a minimum of 24 continuous months, or mobilized for 90 days
• Mobilized before August 1, 1990, for at least 181 continuous days
• Provided 6 years of creditable service in the Reserves or National Guard or at least 90 days under Title 10 or Title 32, with at least 30 being consecutive
• Been the surviving spouse of a service member who died in the line of duty or from a service-related injury or disability

Service time requirements may be waived if you were medically discharged.

Certificate Of Eligibility

To get VA loan benefits, provide your lender with a Certificate of Eligibility (COE) from the Department of Veteran Affairs to confirm you meet the minimum qualifications.

Any applying veterans and service members must have been discharged under honorable conditions.

Lender Requirements

To convert the total amount of your home equity into cash, you’ll need to meet the individual lender’s minimum credit score requirements and standards for debt-to-income ratios (DTIs). In addition, the home that you’re refinancing must be your primary residence.

To convert your total home equity into cash with Rocket Mortgage^®, you must have a minimum credit score of 620. If your credit score is 580, you can only cash out 90% of your home's equity.

How Much Does A VA Cash-Out Refinance Cost?

The cost of a VA cash-out refinance depends on the amount of your loan and your personal financial profile. Your income, credit history and numerous other data points factor into the actual cost of the loan.

You‘ll need to pay for closing costs, which include the VA funding fee and a home appraisal. The funding fee is 2.15% – 3.3% of the total loan, depending on whether you’ve used a VA-backed loan before and how much of your VA entitlement is currently available.

The amount of your down payment isn’t a factor in determining the funding fee. You can either pay it at closing time or roll it into the loan itself.

You’ll also have to pay interest. Over the life of the loan, the amount you pay depends on the amount of your loan and your interest rate.

VA Funding Fee Waivers Are Available

The funding fee may be waived for:

• VA disability recipients
• Surviving spouses of veterans who died while in service (or due to a service-related disability)
• Purple Heart recipients serving in an active-duty capacity

VA Cash-Out Refinance Rates Vs. Standard Cash-Out Refinance Rates

VA cash-out refinances are generally considered less risky by lenders. As a result, rates are typically lower than they are for cash-out refinances on conventional home loans. Be sure to check out today’s refinance rates to get the latest information.

Recouping Costs Of A VA Cash-Out Refinance

It will take some time for borrowers to recoup the initial costs like closing costs, funding fees, and interest accrued. It’s important to to the math and determine how long it will take for a cash-out refinance to pay for itself before committing. Lenders will often provide this information upon application. When going from a VA loan to a VA refinance, fee recoupment cannot exceed 36 months. If you are changing to a VA loan from a non-VA loan, recoupment is less consistent, though it rarely exceeds 84 months.

VA Cash-Out Refinance Vs. VA Streamline Refinance: What’s The Difference?

A VA cash-out refinance is the only option for those who don’t already have a VA loan to refinance into a VA loan.

Pros And Cons Of A VA Cash-Out Refinance

Let’s take a look at the pros and cons of VA cash-out refinancing.

Pros

• Often lower interest rates than conventional refinances
• Can use the funds as you see fit
• Solid way to consolidate high-interest debt

Cons

• Funding fee requirements
• Closing costs
• Potentially owing more than your home is worth if the value drops after you take cash out

Alternative To A VA Cash-Out Refi

Here are a few common alternatives to a VA cash-out refi.

• Conventional cash-out refinance: Conventional refis might have higher interest rates and more stringent requirements. But they don’t require military service and there may be more low-cost options from the Federal Housing Administration (FHA).
• Home equity loans: Home equity loans also allow borrowers to tap into their home’s equity. Typically, borrowers can get a fixed-rate home equity loan that provides a lump sum. The VA does not back home equity loans.
• VA streamline refinance: As we mentioned earlier, this is an alternative for those who already have an existing mortgage with the VA.
• Home equity line of credit (HELOC): A home equity line of credit works like a credit card, meaning borrowers only repay and pay interest on the amount of the loan that they use.

VA Cash-Out Refi FAQs

Here are a few questions people often ask about VA loan cash-out refinances.

If I do a VA cash-out refinance, do I have to take out cash?

Curiously, the answer is no. In the case of borrowers with a preexisting VA mortgage loan who don’t want to take out any cash, a VA streamline refinance will present the quickest and easiest solution. Be sure to compare lenders and offers as you go about the process of researching potential opportunities.

What are the VA cash-out refinance credit score requirements?

This depends on your lender and the amount of lending risk they’re willing to take on, though the VA imposes no minimum credit requirement. Rocket Mortgage accepts applicants with a credit score as low as 580.

Can I do a 100% VA cash-out refinance?

Most mortgage lenders will allow you to refinance up to 100% of your loan-to-value ratio (LTV) in a VA cash-out refinance. However, some will only permit you to borrow a maximum of 90% of your home’s appraised value.

At Rocket Mortgage, you can cash out 100% of your home's equity with a credit score minimum of 620. If your credit score is below 620 you can only cash out up to 90% of your home's equity.

Is an appraisal required for a VA cash-out refinance?

You’ll need to get a home appraisal if you get a VA cash-out refi. It’s one of the closing costs of the program.

How will cash-out refinancing affect my VA entitlement?

You’ll need to use additional VA loan entitlement when it comes to a cash-out refinance, as it will use part of your available entitlement to create a larger loan.

The Bottom Line: Understanding VA Cash-Out Refinance Basics

A VA cash-out loan can be a helpful way to improve your overall financial well-being or even extend the amount of time that you have to repay your loan. Just be sure you qualify before starting the application process and shop around when considering potential lenders.

Do you think a VA cash-out refinance is right for you? If so, start your application online with Rocket Mortgage today.