How does a VA cash-out refinance work?

Smiling mom in her military fatigues, chasing after her laughing little boy, in the family living roomImage: Smiling mom in her military fatigues, chasing after her laughing little boy, in the family living room

In a Nutshell

A VA cash-out refinance can help you tap into your home equity by replacing your current mortgage with a new one. You might be eligible even if your current mortgage isn’t a VA loan.
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A cash-out refinance can be a valuable way for homeowners to take equity from their homes and use it for debt consolidation, renovations or major purchases.

Current and former military members may be able to take out a VA cash-out refinance loan, which offers the same perks as a typical VA loan.

If you’re considering a VA cash-out refinance, it’s important to understand how they work. Let’s take a closer look and review how a VA cash-out refinance can be used to draw on your home equity.

Does the VA allow cash-out refinances?

The Department of Veterans Affairs offers several loan programs to help certain military members and veterans purchase, renovate or refinance their homes. In most cases, the VA backs these loans rather than originating them. In other words, they work with other lenders to guarantee a portion of the loan so that if the borrower doesn’t make their payments, the lender can recover some or all of its losses.

Among the loan programs that the VA offers are two refinance programs. One is a VA cash-out refinance that allows borrowers to pull equity from their home to pay for renovations, consolidate debt or use for another purpose.

The requirements for taking out a VA cash-out refinance loan resemble those of other VA loans. To qualify, you’ll need a Certificate of Eligibility from the VA, meaning you’ll have to meet certain service history and duty status requirements.

In addition to meeting the VA’s service requirements, you must also live in the home you’re refinancing and meet your lender’s requirements for credit, income and other factors.

Learn more: Guide to Veterans Affairs benefits and loans

How does a VA cash-out refinance work?

Cash-out refinance loans are similar to traditional mortgage refinancing, where you essentially replace your current mortgage with a new one.

The major difference between a traditional refinance and a cash-out refinance is that a cash-out refinance allows you to pull equity from your home. In other words, you take out a new mortgage that’s larger than what you owe on the home. The excess amount is given to you in cash.

You can then use those extra funds for any purpose, including making a large purchase, paying off debt and more. Your new loan balance will be your original loan balance plus the amount of equity you took from the home.

VA cash-out refi perks — and costs

A VA cash-out refinance has additional benefits, including having the same perks as traditional VA loans. First, this type of loan allows you to refinance a non-VA loan into a VA loan. You can borrow up to the conforming loan limit set by the Federal Housing Finance Agency ($647,200 for one-unit properties for most areas in 2022).

When you close on your VA refinance loan, you’ll have to pay any closing costs your lender charges, which could include an origination fee, discount points, appraisal fee and more. You’ll also have to pay a VA funding fee for your refinance loan unless you meet certain exceptions, such as receiving certain compensation or pay for having a service-connected disability or a Purple Heart. The funding fee you’ll pay for a cash-out refinancing loan depends on whether you’ve used this type of loan before. The fee is currently 2.3% for your first such loan and 3.6% for subsequent loans.

What is the maximum LTV for a VA cash-out refinance?

VA loans — whether for a purchase or cash-out refinance — allow you to borrow up to 100% of the value of your home. For example, if you have a home valued at $300,000 and have a mortgage balance of $200,000, you can take the full remaining $100,000 out in cash. The amount you’re able to borrow is determined by a home appraisal ordered by your lender.

And unlike VA purchase loans, your loan-to-value ratio, or LTV — meaning the percentage of the home’s value you can finance — doesn’t affect your funding fee amount for a VA cash-out refinance.

It’s important to note that with a VA loan, you’ll still have to meet your lender’s requirements regarding your income, credit and more. And if you can’t afford the monthly payment on a cash-out refinance with a 100% LTV, then you may have to reconsider your cash-out amount.

Can you do a VA cash-out refinance on a free and clear property?

Unfortunately, you likely can’t get a VA cash-out refinance if you own the home free and clear. Instead, the VA requires that this loan refinance an existing lien against the property.

The good news is that there are few requirements for the type of loan you must currently have. First, you don’t necessarily have to have a VA loan to qualify. In fact, the VA clearly states that a VA cash-out refinance can be used to refinance a non-VA loan into a VA loan.

There’s also no requirement to be current on your mortgage to qualify for a VA refinance loan. You may be eligible for a VA cash-out refinance loan if you’re delinquent on your current loan. You might also be able to refinance even if the lien on your property is a tax lien or another judgment lien rather than a mortgage.

What’s next?

If you’re considering a VA cash-out refinance, your first steps should be to confirm that you’re eligible and to find a VA-approved lender.

Check the VA’s loan requirements on its website to see if you might qualify for a Certificate of Eligibility. If you think you’ll qualify, you can request your certificate on the eBenefits platform.

About the author: Erin Gobler is a freelance personal finance writer based in Madison, Wisconsin. Erin studied journalism and political science at the University of Wisconsin-Oshkosh and began writing full-time after a seven-year caree… Read more.