VA Cash-out Refinance | Rates, Guidelines and Limits 2021
The VA cash-out refinance program allows veterans and active-duty servicemembers to lower their interest rate while converting their home equity into cash.
Unlike a home equity loan, a VA cash-out refinance replaces your existing mortgage rather than adding a second mortgage.
But getting cash isn’t the only reason to get a VA cash-out loan. Qualified veterans with existing non-VA loans may replace their current loan with a VA cash-out refinance to lower their interest rate, get out of an adjustable-rate loan, or to eliminate expensive mortgage insurance.Check your VA cash-out eligibility. Start here (Oct 26th, 2021)
What you can do with the cash
Qualified borrowers can use cash from their refinance to make home upgrades, pay down high-interest loans and credit cards, take a vacation, or for any other purpose.
Low interest rates and flexible payment terms make it a great time to invest in your home or use equity to pay off other expenses. But keep in mind you will have to repay the money as part of your new monthly mortgage payment.
Benefits of the VA cash-out refinance
The VA offers some special privileges with a cash-out refinance — just as it does with home purchase loans.
Some of the benefits include:
- Finance up to 100% loan-to-value (LTV) ratio. You could borrow up to the full market value of your home. (This may vary by lender. Some allow you to take up to only 90% of your home’s value. If you need 100%, shopping around may be necessary)
- Eliminate mortgage insurance. VA loans don’t require annual mortgage insurance fees like other loan types; refinancing into a VA loan can remove this added cost
- No out-of-pocket closing costs. Loans can be structured to include all closing costs into the new loan amount, so no cash is required at closing
- Low VA funding fees. This one-time fee is between 2.3%-3.6% of the loan amount unless exempt; the fee helps keep the VA loan program running
- Refinance any loan type. A VA cash-out refinance can pay off any type of home loan for eligible veterans — even if you don’t have a VA home loan already
- Lower refinance rates. VA cash-out refinance rates are typically lower when compared to similar loan types
How the VA cash-out refinance works
A VA cash-out refinance loan combines two benefits into one loan:
- Refinancing: This loan pays off your current mortgage and replaces it with a larger loan. This may allow you to lower your overall interest rate to save money over the life of the loan
- Cash back: Since the new loan is larger, you’ll have some leftover money after paying off your existing mortgage. This extra money is your “cash out,” and you can use it however you want
A cash-out refinance example
Let’s say your house is worth $250,000 but you owe only $150,000 on your current loan.
Your new cash-out refi’s loan balance could reach as high as $250,000, the full market value of your home.
With the new loan you’d pay off your $150,000 mortgage, leaving a balance of $100,000 which you could receive as cash back, minus closing costs and fees.
While the VA will allow homeowners to borrow against their home’s entire market value, not all lenders will let you go this far. Some may cap your loan at 90% loan-to-value (LTV).
For a home valued at $250,000, 90% LTV would mean a maximum loan of $225,000, generating $75,000 in cash back from home equity after paying off the existing $150,000 loan.
Who should get a VA cash-out refinance?
For most homeowners, this loan works best when you need both its benefits: a refinance and cash from your home equity. If you don’t need both benefits, another mortgage could work better for you.
For example, if you already have a really good mortgage rate and a payment you can afford, you don’t need to refinance your entire home loan.
Instead, you could use a home equity loan to borrow against your home equity. The VA itself doesn’t back a home equity loan so you’d need to use another type of loan.
Or, if you’re already a VA homeowner who needs a lower rate or a longer term to make your payments more affordable, the VA Streamline Refinance (VA IRRRL) can help.
Using the VA cash-out without getting cash back
If you qualify for the VA’s home loan benefits but have another type of loan — an FHA mortgage, for example — you could use a VA cash-out to get into the VA program.
Despite its name, you don’t have to take cash back; you could use it as a simple refinance of your existing FHA loan amount. One of the biggest benefits to this strategy would be eliminating your FHA loan’s mortgage insurance premiums.Get a live rate quote for your VA cash-out refinance here (Oct 26th, 2021)
Getting rid of mortgage insurance with the VA cash-out refi
Along with lowering interest rates or reducing monthly payments by extending your loan term, there’s another popular reason to refinance an existing mortgage loan: eliminating mortgage insurance.
Most non-VA mortgage loans require some kind of mortgage insurance that protects the lender in case you default on the loan. This insurance protection helps make loans more affordable, so it’s not all bad. But it still costs money every month.
For example, if you have a $200,000 FHA loan and you made the minimum down payment (3.5%), the annual mortgage insurance premium is 0.85% of the loan value. That may not sound like much, but it equals $141.66 per month.
VA loans do not require these ongoing mortgage insurance payments. They charge a one-time, upfront funding fee instead. So replacing your FHA loan with a VA cash-out refinance can eliminate this extra monthly expense.
A VA cash-out refinance can also eliminate private mortgage insurance on a conventional loan or a USDA loan’s ongoing guarantee fee.
VA cash-out refinance rates
The interest rate you get on your VA cash-out refinance affects the amount of your new mortgage payment and your ability to save on your interest payments long term. A rate that’s too high can erode your potential savings.
Your new VA cash-out rate will depend on:
- Current rate trends: Rates have been hovering at historic lows during the COVID-19 pandemic, helping buyers and refinancers save money long-term
- Your personal finances: Your debt-to-income ratio, credit score, and income stability influence your rate. Borrowers with better credit profiles can often get lower rates
- Your loan size: Borrowing up to the full value of your home (100% LTV) will likely require a higher rate since this type of loan is riskier for the lender
The good news is that VA-backed loan rates tend to be among the lowest lenders can offer. But among VA loans, cash-out refis often have higher rates because of their higher risk for lenders.
Not all VA lenders offer the same rates on VA loans, so you should shop around and compare Loan Estimates from at least three lenders to find the best deal.
VA cash-out refinance eligibility requirements
If you’ve used a VA loan to buy your home, you’re already familiar with the VA loan program’s requirements. The cash-out refi’s requirements will be similar.
If you’re new to the VA loan program, be sure you check out its eligibility guidelines, including adequate service history, before applying. (All Veterans must have been discharged under conditions other than dishonorable.)
The following borrowers can likely access VA loan benefits:
- Veterans with an honorable discharge and adequate military service history
- Current active-duty servicemembers with adequate service history
- Current Reserve and members of the National Guard (six years of service is typically required)
- Unmarried surviving spouses of military vets
- Commissioned officers of the Public Health and National Oceanic and Atmospheric Administration
If you don’t know whether you’re eligible for the VA home loan program, call (866) 240-3742 to speak with a licensed lender who can answer your questions and help you apply.
VA cash-out refinance with bad credit
The VA doesn’t set a minimum credit score for any of its loans. Unfortunately, that doesn’t mean getting a VA cash-out refinance with bad credit is a done deal. That’s because VA lenders can superimpose their own rules over the VA’s.
For example, many VA lenders won’t work with a borrower with a FICO credit score below 620. A few do but they might take some tracking down. A smarter move might be to work on improving your score.Get a live VA cash-out rate quote here (Oct 26th, 2021)
VA cash-out refinance guidelines for 2021
Here are some specific details about how this loan program works.
What’s the maximum size for a VA cash-out refinance?
The Blue Water Navy Vietnam Veterans Act of 2019 removed loan limits for VA loans. As of January 1, 2020, the Department of Veterans Affairs no longer sets loan limit maximums.
Instead, your mortgage lender will limit the size of your loan based on your credit history and debt-to-income ratio (DTI) as well as your income stability — just like it would with a conventional loan.
For an in-depth look at VA loan limits, see our VA loan limits page.
How much will my VA cash-out refi cost?
Along with your loan’s interest rate which we discussed above, you can measure your new loan’s costs in:
VA loan closing costs
Your VA cash-out refinance closing costs are similar to those for a VA home purchase mortgage. Though, unlike with a home purchase, there’s no seller to negotiate paying your closing costs.
The good news: Most borrowers can roll their closing costs, including the VA Funding Fee, into the new loan. You may not need a lot of out-of-pocket cash.
However, even with the most generous lender, your new loan amount and the closing costs combined can’t exceed 100% of your home’s market value. So financing closing costs into your loan amount reduces your amount of cash back.
VA funding fee
The one-time funding fee for a VA cash-out refinance is between 2.3% and 3.6% of your loan amount. Exactly how much will depend on whether you’ve used a VA loan in the past.
This fee helps insure your loan, making it easier for private lenders to extend lower rates even when you borrow up to the value of your home.
Read more: 2021 VA Funding Fee Chart
Will I need a new appraisal for my refinance?
An appraisal is required for a VA cash-out refinance. Your home’s appraised value tells the VA and your lender how much cash back you can receive.
An independent expert will verify your home’s market value, and an appraiser’s fee will be among your closing costs.
Should I get a VA streamline refinance instead?
The VA also offers another refinance loan called a streamline refinance, also known as the Interest Rate Reduction Refinance Loan (VA IRRRL). You must already have a VA home loan to use this loan program.
Streamline refinancing does not generate cash back for homeowners except for up to $6,000 to make energy-efficient home improvements.
But a streamline refi works well for homeowners who want to access today’s lower mortgage rates or to reduce their monthly payments by extending their loan term.
Lower interest rates can lower your overall monthly mortgage payment but they also “reset the clock” on your existing loan. (Payments are spread over another 30 years instead of the period left on your current mortgage.)
Read more: VA Streamline Refinance (IRRRL Program)
VA cash-out vs. VA Streamline Refinance
|VA Streamline Refinance||VA Cash-out Refinance|
|Can combine 1st and 2nd mortgage||No||Yes|
|Maximum LTV||No maximum/not verified||100% (in some cases)|
|Maximum loan amount||Current loan balance, plus closing costs||None|
|VA funding fee||0.50% (unless exempt)||2.3%-3.6% (unless exempt)|
|Late payments allowed (last 12 months)||1 (30 days)||0|
|Must be owner-occupied property||No||Yes|
Source: VA Handbook
Perhaps the most notable difference between these two refinance programs is that the VA cash-out refinance loan has a maximum loan-to-value (LTV) of 100%, but there is no maximum LTV for VA streamline refinances.
This is because the VA streamline refinance does not require an appraisal, so the current value of the home is not determined. An appraisal and a current home value is required for a cash-out refinance, however.
What does all that mean? You can get a VA streamline refinance (IRRRL), even if your home is “underwater” — you owe more on your mortgage than your home is worth.
The Department of Veterans Affairs can offer streamline refinance options because it doesn’t lend money. Private lenders lend the money.
The VA’s role is to insure loans which makes them more affordable. If you can’t make your VA loan’s payments, the VA will have to cover the lender’s losses. So the VA benefits when you have a more affordable mortgage payment.Complete a short online form to get a live VA refinance rate quote (Oct 26th, 2021)
The VA cash-out refinance application process
If you’re interested in getting a VA cash-out refinance, here’s how to get started:
Step 1: Is this loan for you?
Answer these questions to see whether you should proceed with this refinance option:
- Can you afford the new loan? A cash-out loan raises your mortgage balance and could increase your monthly payment. Do you have enough income to meet your monthly mortgage payments, pay your monthly debts and other financial obligations, and still have enough left to pay for food and other living expenses?
- Does the refinance apply to the mortgage on the home you’re currently living in? You can’t get a cash-out refinance for a real estate investment property — only for a primary residence.
- Do you have at least a fair credit history? Most lenders insist on a 620 minimum credit score for VA cash-out loans.
- Do you have your DD-214? You’ll need this document to get your Certificate of Eligibility which shows you’ve met the military service requirements to receive VA loan benefits. If you don’t have it, a loan officer can help you get it.
You can save some time and money by making sure you can afford and qualify for this type of loan before applying.
Step 2: Shop around with lenders
There’s a common misconception about mortgage loans backed by the VA. A lot of borrowers have the idea that all VA lenders work the same way.
This isn’t true. The VA authorizes private lenders and sets general rules for VA loan underwriting. But different lenders use their own underwriting guidelines, too.
As a result, you could get a lower refinance rate or lower origination fees by shopping around with at least three different lenders.
It’s not good enough to compare advertised interest rates which are almost never the same rates you can get. You’d have to apply for a pre-approval to get an accurate quote.
Step 3: Continue the application process
Once you’ve picked a VA mortgage lender, you’re ready to make your application official. If you got pre-approved, you’ve already gathered a lot of the documents you’d need to apply — things like your W-2 forms, pay stubs, and your Certificate of Eligibility.
Your loan officer should help guide you through the process of submitting your application for the VA cash-out refinance.
Sometimes lenders ask for additional financial documents such as tax returns, so be ready to respond as quickly as possible to keep your refi on track.
Step 4: Close on the loan to make it official
On your new mortgage loan’s closing day, you’ll make the transaction official by signing a big stack of documents. Proceeds from your new loan will pay off your current mortgage. Part of the money will cover closing costs or up to two discount points which lower your rate.
After all the accounts have been settled, you’ll receive the remaining loan proceeds as cash back via a check or an account transfer. You can use the money any way you want.
But remember: It’s not free money. You’re paying it back as part of your new mortgage payment. So it’s best to spend it on long-term needs like home improvements or debt consolidation.
VA cash-out refinance FAQs
Does VA allow cash-out refinancing?
Yes, the VA’s cash-out refinance loan can replace any other mortgage loan with a VA loan while also cashing out home equity.
What is the seasoning requirement for a VA cash-out refinance?
The VA requires a 210-day seasoning period before it replaces your existing VA loan with a VA cash-out mortgage refinance. But if you’re refinancing from a non-VA loan you may not have to wait as long. It’ll depend on your lender.
What is a Type 2 VA cash-out refinance?
A Type 2 VA cash-out is a loan in which your new loan balance is larger than your existing loan’s balance. The difference in loan sizes creates the cash back component of the loan.
What is the maximum LTV on a VA cash-out refinance?
The VA itself can approve up to 100% loan-to-value (100%). This means your loan size can equal the value of your home. However, VA-authorized lenders can limit your LTV to 80% or 90% depending on your credit profile and the lender’s rules.
Do I have to wait 6 months to do a cash-out refinance?
Yes. The VA won’t replace a VA loan with a cash-out refinance until you’ve had your current loan 210 days. For most borrowers, 210 days leaves time to make at least six loan payments. Your lender may have lender-specific waiting periods, too.
Can you do a VA cash-out refinance in Texas?
No, the Texas state constitution does not allow VA cash-out refinance loans. But homeowners in Texas can get a 50(a)(6) loan with up to 80% LTV from most lenders.
Am I eligible for a VA-backed cash-out refinance loan?
Only veterans, active-duty service members, and some surviving spouses can use VA loans, including the VA’s mortgage refinance loans. You’ll need a Certificate of Eligibility (COE) from the VA to prove you meet the military service requirements.
But getting a COE doesn’t guarantee your loan. You’ll still need to meet your lender’s credit requirements to borrow money.
What credit score is needed for a VA cash-out refinance?
The VA no longer sets minimum credit scores for VA borrowers. Instead, it lets lenders decide. Many lenders look for scores in the 620 to 640 range. But it’s possible to find exceptions by shopping around.
What is the funding fee for a VA cash-out refinance?
Your funding fee for the VA cash-out refinance will be at least 2.3% of your loan amount. This amount equals $5,750 on a $250,000 loan. If you already have used the VA loan benefit before, your funding fee will be 3.6%, or $9,000 on a $250,000 loan. The fee can come out of the cash out your loan generates, so you don’t have to bring cash to closing.
Why use a VA cash-out when a Streamline Refinance is easier?
The VA cash-out refi has a couple of advantages over the VA IRRRL, also known as the VA streamline refinance:
- The VA cash-out works to refinance any loan type while the IRRRL refinances only VA loans
- The VA cash-out can borrow against up to 100% of your home equity. A streamline is designed to pay off your current loan without providing extra cash (except for up to $6,000 to spend on energy efficient home improvements)
If you have a VA loan and don’t need cash out, the streamline could be your best option.
Do I need a new appraisal for a VA cash-out refi?
Yes. The new home appraisal assigns your home’s current market value. Lenders will use your market value to set your loan size and determine how much cash-back you can get.
Can I get a VA cash-out loan on an investment property?
No. The VA loan program exists to help military families buy a primary residence. You’ll likely need a conventional mortgage to cash out equity on an investment property.
Can I get a VA cash-out loan on an FHA loan?
Yes. The VA cash-out can replace an FHA, USDA, or conventional mortgage — along with a current VA loan. And you don’t have to get cash back. This makes these loans useful for veterans who have FHA loans and want to eliminate the FHA’s mortgage insurance.
Can I lower my monthly payments with a VA cash-out loan?
It’s possible to lower your monthly payments with a VA cash-out refinance, but this depends on your current loan’s rate and term. If you’re extending your loan’s term, your payments may decrease. But keep in mind, longer terms charge more interest over the life of the loan.
Are VA loans good?
Yes. The VA home loan program helps veterans and active duty military members buy safe and affordable homes.
VA cash-out refinance next steps
Overall, the application process is easy, though the home appraisal is an added step that can increase the time for processing a VA cash-out refinance.
To get started, call (866) 240-3742 to speak with a knowledgeable mortgage professional. Or, simply fill out a short form and a licensed VA loan expert will guide you through the process.Complete a short online form to get a live VA refinance rate quote (Oct 26th, 2021)