Inside the VA Cash Out Refinance

Grant Moon

Published July 07, 2021

What Is a VA Cash-Out Refinance?

A VA mortgage, just like any other mortgage, can be refinanced. A VA home loan is eligible for either a standard refinance or a "streamline" refinance.

A VA streamline refinance, sometimes called an Interest Rate Reduction Refinance Loan, or IRRRL, needs no appraisal and requires minimal documentation from the borrower. No income documentation, employment verification or credit score is needed, hence the "streamline" name.

But what if the borrower wants to pull out additional cash from the refinance? By choosing a cash-out refinance, the streamline option goes away, but this option comes with benefits.

Benefits of a Cash-Out Refinance

A VA-backed cash-out refinance loan can help borrowers to take cash out of their home equity to:

Pay off high-interest debt like credit card debt
Pay off liens
Pay for school
Make home improvements

A cash-out refinance can also allow a borrower to refinance a non-VA loan into a VA-backed loan.

VA Cash-Out Refinance Loan Amount

The VA doesn't have a maximum loan amount, yet does have a maximum amount it will guarantee. This guaranty is 25% of the VA home loan should it go into default.

In a cash-out refinance, the loan amount is capped at 100% of the property's value, based on a new appraisal. However, even though the VA allows for a cash-out refinance, it doesn't mean VA lenders will do so. Most VA lenders cap the maximum loan amount at 90% of the value of the home.

To give an example, let's say a borrower applies for a VA home loan and the appraised property value is $300,000. The maximum loan amount according to the VA's rules will be the same as the value, $300,000. So if the existing VA mortgage balance is $200,000 and closing costs are $5,000, the cash to the borrower will be $300,000 minus $205,000, or $95,000.

VA Cash-Out Refinance Income Requirements

While the VA streamline refinance requires no income or employment documentation, the VA cash-out loan requires the borrower to provide evidence of both. This usually means providing pay stubs for the most recent 30-day period. Income must be verified for everyone on the loan application.

The borrower will also be asked to provide W-2 forms from the previous two years. Many VA lenders also ask for copies of the most recent two years of federal income tax returns. The lender is required to determine that the borrower's income is sufficient to cover the new cash-out mortgage payments in addition to other monthly obligations, such as automobile, credit card or student loan payments.

Credit Score Requirements for a Cash-Out Refinance

Unlike the VA streamline refinance, the borrower's credit report will be pulled and reviewed by the VA lender evaluating the VA cash-out refinance request. While the VA does not establish a minimum credit score, most lenders require a minimum credit score of 620. However, lenders have the right to require a score of 680 or above.

VA Lender Property Appraisal

All VA cash-out loans require a full appraisal, since the maximum loan amount is based on the home's current appraised value. But the borrower can opt for less than the full amount. Just because a VA cash-out loan can be as much as 100% of the value of the property does not mean the veteran is required to accept the maximum.

Is a Cash-Out Refinance a Good Idea?

When considering a VA cash-out refinance loan, care should be taken to make sure the VA cash-out program is a true benefit to the borrower. Remember that VA home loans require a funding fee that can be as much as 3.15% of the loan amount, reducing the net amount of cash to the borrower.

If you have enough equity in your home, a cash-out loan underwritten to conventional standards can provide more cash to you without the need for a funding fee.

Pros and Cons of a VA Cash-Out Refinance

Pros:

You can turn your home's equity into cash.
You may be able to drop your mortgage rate at the same time.
You may be able to gain the ability to pay off a non-VA loan if needed.
You may be able to eliminate private mortgage insurance (PMI).

Cons:

There are limits on the amount of liability the VA can assume.
You'll likely need to pay a funding fee on top of closing costs.
Paperwork. You are required to provide documentation such as paycheck stubs, W-2 forms, federal income tax returns and any other information your lender requires.