A VA-backed cash-out refinance loan lets you replace your current loan with a new one under different terms. If you want to take cash out of your home equity or refinance a non-VA loan into a VA-backed loan, a VA-backed cash-out refinance loan may be right for you. Find out if you’re eligible—and how to apply for your Certificate of Eligibility.
How It Works
During a cash-out refinance, you pay off your first mortgage, get a new one for a larger amount and gain the difference as cash. How much cash back you can get varies by lender. You can use the money for anything you want. You also may be able to lower your interest rate and monthly payment, and change the length of your mortgage at the same time. Because you’re getting a new mortgage, the process is similar to getting a VA loan to buy a house.
Here’s an overview of what you’ll do:
Find a VA-approved lender, if you don’t already have one.
Provide information and documents about your finances for your lender to review.
Get a Certificate of Eligibility from the VA; ask your lender if they’ll do this for you.
Have a VA-approved appraiser assess and inspect your home.
Pay the VA funding fee, unless a disability makes you exempt.
Close on your loan.
Lower Your Interest Rate on a VA Loan You Already Have
If your current mortgage was financed by a VA loan, you have another refinance option: the Interest Rate Reduction Refinance Loan, or IRRRL. It’s used to refinance your current VA loan to one with a lower interest rate.
You can’t get cash back with an IRRRL, but it comes with these advantages:
Lower monthly payment
Quick and easy process
No new Certificate of Eligibility required
No money out of your pocket if you roll refinancing costs into the loan
A lower VA funding fee than a cash-out refinance
Who qualifies for a VA mortgage refinance?
Generally, you become eligible for a VA home loan once you have completed 90 days of active-duty military service during a named conflict, six years of service in the National Guard or Reserves or 181 consecutive days of active duty during times of peace. You might also be eligible for a VA loan if you are married to a service member who died in the line of duty or as a result of a service-related disability.
You must have been honorably discharged to qualify, unless you meet certain exceptions. In terms of additional VA requirements, VA home loans require a Certificate of Eligibility (COE) that proves your military service. You also have to agree to occupy the home as your primary residence. From there, individual mortgage lenders set criteria that determine whether you qualify for a VA loan.
Generally speaking, you’ll need a credit score of at least 620 to be approved for a VA loan or a VA loan refinance with the exception of an Interest Rate Reduction Refinance Loan, or IRRRL, which doesn’t require underwriting. Borrowers also need to show sufficient income to repay their loans, although the guidelines for approval are generally easier to meet when compared with conventional mortgage loans.
What are the benefits of refinancing with a VA loan?
The benefits of refinancing your mortgage with a VA loan are plentiful, which is why VA home loans are so popular among those who can qualify. VA loans don’t require a down payment, whereas another government-backed loan, the FHA home loan, requires at least 3.5 percent down. However, you’ll still need to be prepared to pay refinance closing costs.
Here are the other key advantages of refinancing with a VA loan:
No mortgage insurance requirement:
VA home loans do not require the borrower to pay mortgage insurance on top of the monthly mortgage payment, even with no down payment.
Minimal upfront costs:
VA loans typically charge a funding fee that the borrower pays upfront, which can be wrapped into the closing costs when you refinance. (If you choose this option, you’ll be financing these costs, so you’ll pay more in interest.) You can avoid paying the funding fee altogether if you are living with a service-related disability and meet specific requirements, or if you are the surviving spouse of a veteran who died in service or from a disability resulting from military service.
Save on interest:
VA home loan rates are generally competitive, and often lower than what you might qualify for with a conventional refinance. Run the numbers though to calculate potential savings — some homeowners actually pay more in interest when they refinance and reset the loan term, even with a reduced rate.
Flexible qualification criteria:
The relaxed credit and income requirements on a VA loan make qualifying easier. (Note: The eligibility guidelines are more stringent for VA cash-out refinance loans).
No prepayment penalties:
Like many other loans, with a VA loan, you can pay off your home early if you want without having to worry about added fees or “gotchas.”
Potential for a predictable monthly payment: If you’re currently in an adjustable-rate loan, you can switch to a VA fixed-rate mortgage to get a predictable monthly payment.
How to refinance into a VA loan
There are two main options available to you when you choose to refinance with a VA loan:
Interest Rate Reduction Refinance Loan (IRRRL)
The Interest Rate Reduction Refinance Loan, or IRRRL, can be used to refinance an existing VA loan into a new VA loan with a lower interest rate. This loan is available without an appraisal or any credit underwriting, and you can include all of your closing costs in your new loan product.
The funding fee for this type of VA refinance loan may be lower than the fee for applying for a VA loan to purchase a property.
This loan can be a smart option if you can qualify for a lower interest rate because rates went down, and if you prefer to have a lower monthly payment. However, note that you cannot get cash out from your equity if you refinance your current VA loan with an IRRRL.
VA cash-out refinancing
A VA cash-out refinance loan allows current homeowners refinance their mortgage and take out some or all of their accrued equity. With this type of refinance, veterans could get their hands on cash they could use to pay off debt, make home improvements and more.
If you’re considering this option, have a clear goal in mind for the funds, and be realistic about your own habits. If you intend to use the cash to pay off credit cards, for example, you’ll need to be sure you won’t accumulate an unmanageable balance again in the future.
This type of loan can be used to refinance an existing VA loan or a conventional mortgage, and the VA will guarantee loans worth up to 100 percent of the value of the home. Like other VA loans, this loan requires you to meet military service requirements and have a Certificate of Eligibility (COE) on hand.
What is an Interest Rate Reduction Refinance Loan (IRRRL)?
One refinance option, if you have a VA-backed loan, is an Interest Rate Reduction Refinance Loan (IRRRL). Also known as a streamline refinance, an IRRRL allows you to refinance your VA-backed mortgage to get a potentially lower interest rate or switch from an adjustable rate to a fixed rate. Although an IRRRL is backed by the VA, you’d get the loan from a bank, credit union, or other lender.
What Are the Benefits of a VA IRRRL Refinance?
With an IRRRL — or any other VA loan — you won’t have to pay private mortgage insurance (PMI), which is typically between $30 to $70 per month for every $100,000 on the mortgage, according to Freddie Mac. Most conventional lenders require you to pay PMI if you make a down payment that’s less than 20% of the home’s value. Another perk of an IRRRL is that you won’t have to provide much documentation. “Unlike a cash-out refinance, the standards for documentation are much lower for an IRRRL,” says Bronnenkant.
Typically, lenders will need you to provide documents to prove the income, assets, and debt you self-report on the application, in order to verify your creditworthiness. With an IRRRL, the burden of proof is much lower, and therefore the application process is simpler.
What Are Some Disadvantages of a VA-Backed Cash-Out Refinance?
The interest rate that comes with a cash-out refinance is often higher because banks consider this type of refinance riskier than alternate refinancing options. So if you’re looking to secure a lower rate with a refinance, this may not be the option for you.
Another drawback: You’ll have to pay the VA funding fee (2.3% for the first use, then 3.6% after) either upfront or using the cash withdrawn from the equity of your home. And this refinance option also has more stringent approval standards; you’d have to meet a minimum credit requirement from the lender and go through a credit underwriting and appraisal process.
The home you’re refinancing must also be your primary residence, and not a vacation home or investment property.
In terms of documentation, the VA specifies that you’ll need to provide copies of paystubs for the most recent 30-day period, as well as W-2 forms and copies of your federal income tax returns for the past two years, in order for the lender to verify your creditworthiness.