VA Home Equity Loans | Options & Requirements 2022
The VA doesn’t have an official home equity loan program.
But, don’t despair. As an honored service member, active or not, you still have options for locking down a VA home equity loan –– specifically, the VA cash-out refinance loan program.
Or, you can always apply for a non-VA loan to access the home equity you’ve built with your VA mortgage.Ready for a VA cash-out refinance? Start here (Dec 1st, 2022)
In this article:
- What is a home equity loan?
- VA cash-out refinance: Alternative to home equity loans
- How to get a VA cash-out refinance
- HEL, HELOC, or cash-out refinance
- Pros and cons of all 3 home equity loan types
- VA home equity loan FAQs
- Where do I apply for home equity loans?
VA homeowners can access equity
For decades, the Department of Veterans Affairs has been helping active duty service members and veterans become homebuyers.
One of the biggest benefits of homeownership is the ability to use your home’s built-up value — which lenders call your home equity — in other parts of your financial life.
As a VA homeowner, you’ll have several ways to leverage your home equity, but only one that’s backed by the VA itself: the VA cash-out refinance.
To get a second mortgage to access your equity, you’d need to use a non-VA loan product.
Your VA home equity options
VA borrowers looking to tap their home’s equity for cash can do so in one of three ways:
- Home equity loan (HEL): A one-time, lump-sum loan, often with a fixed interest rate. These loans are not offered by the VA and exist concurrently with your existing VA mortgage.
- Home equity line of credit (HELOC): Rather than a lump sum, this is a maximum loan limit that allows you to borrow, repay and borrow on a continuing basis. As with a HEL, these loans are not available through the VA and function as a second mortgage.
- VA cash-out refinance: Though not technically considered a home equity loan, a VA cash-out refinance allows you to access your home’s equity as cash while still taking advantage of the VA loan program’s many benefits. This loan replaces your existing mortgage.
Home equity is the part of your home’s value that you own because you’ve already paid it off. If your home is worth $200,000 and you owe $100,000 on your mortgage, you have $100,000 in home equity.
A home equity loan lets you use your home equity as collateral on a new loan. It’s like a personal loan except it’s secured by your home’s value so you can get better interest rates.
In general, you are allowed to borrow anywhere from 80 to 100 percent of your available home’s value — minus the amount you currently owe on your primary mortgage loan.
If your lender lets you borrow 80 percent of your $200,000 home, you could access $160,000 in equity. But if you owed $100,000 on your primary loan, that would leave you with $60,000 to borrow.
You could use the money you borrow on anything. But since you’re spending from your home’s value, it makes more sense to pay for long-term needs like home improvements or debt consolidation.
Types of home equity loans
There are two types of home equity lending and each one is suitable for slightly different situations. The Department of Veterans Affairs does not insure either one of these loan options:
- Home equity loan (HEL): The home equity loan is similar to your first mortgage — it’s a one-time, lump-sum loan, often with a fixed interest rate. You get all the money up front, then pay a fixed principal rate and interest payment each month until the sum is fully paid. It’s often called a second mortgage because it resembles your primary, or first, mortgage.
- Home equity line of credit (HELOC): A HELOC works like a credit card backed by your home equity. You have a maximum loan limit and can withdraw funds when needed. You can borrow, repay, and borrow again at will. This type of loan is great for home improvement projects where you need smaller amounts of cash as you go along, or for homeowners that prefer to part out projects into smaller tasks. It can also help if your income varies a lot and you need to address cash-flow issues as they arise.
Advantages of home equity loans
Because they use your home equity as collateral, interest rates for a home equity loan or home equity line of credit (HELOC) can be very low — much lower than interest rates on credit cards and personal loans.
This is why many homeowners find this type of financing perfect for home renovations, car purchases, or even to finance a child’s college education. They’re also often used to consolidate debts that are becoming burdensome.
Why doesn’t the VA offer home equity loans or HELOCs?
The Department of Veterans Affairs does not offer home equity loans or HELOCs for one simple reason: the VA backs only first-lien mortgages to help military families become homebuyers.
A home equity loan helps people who already own homes, so it’s not in the scope of the VA’s core mission.
But even though the VA doesn’t guarantee home equity loans, you can still borrow from an independent lender, while keeping your VA home loan as your first mortgage. Like your first mortgage, if you fail to keep up on payments with a second mortgage, you could lose your home.
The VA does not offer home equity loans, but it does give homeowners another way to access home equity: VA cash-out refinance loans. Cash-out refinancing replaces your existing mortgage with a new, bigger one — and you take the difference out in cash.
In this way you could borrow against your equity without having two mortgage loans, and your loan would still be backed by the Department of Veterans Affairs.
Advantages of VA cash-out refinancing
The VA cash-out refi is a popular product, especially in times of low interest rates. Here are some of the main reasons why:
- High loan-to-value ratio (LTV): Unlike most home loans, the VA cash-out refi lets you access up to 100% of your home equity. Conventional cash-out refis usually require homeowners to leave at least 20% of their equity unused
- Will refinance any loan type: The VA cash-out can refinance any mortgage loan, including FHA and USDA loans. (The VA IRRRL streamline refinance works only if you already have a VA loan)
- No mortgage insurance required: Even when you have a high loan-to-value ratio, the VA doesn’t require mortgage insurance. This is a unique perk that only VA-backed borrowers can get
- VA mortgage protections apply: The VA won’t let a lender charge more than 1% of the loan amount as an origination fee
- VA funding fee can be financed: If necessary you could finance your 2.3% VA funding fee into your new loan, as long as you stay within your lender’s LTV rule
Sometimes lenders enforce stricter underwriting rules than the VA requires, especially when it comes to loan-to-value ratios or credit score requirements.
Check with your loan officer about your lender’s specific rules.
Should you consider a VA cash-out refinance?
Before you apply for a VA cash-out refinance ask yourself the following questions to determine whether it’s the right mortgage loan product for you:
- Can I comfortably afford my current monthly payments?
- Do I have enough income to afford a higher monthly payment?
- Do I have enough home equity to make a refinance worthwhile? (The VA allows using up to 100% of your equity, but your lender may not)
- Is my credit score high enough to qualify? (620+ is usually fine, but some lenders may go lower)
- Am I comfortable paying closing costs? (These are similar to your original mortgage and can be paid in cash or added into the new loan)
- How will my interest rate change? It’s rarely wise in the long term to refinance to a higher rate. Consider a home equity loan or HELOC if a new VA cash-out refi would raise your rate
A VA cash-out refinance is bigger and more complex than the VA’s IRRRL streamline loan which doesn’t allow cash back.
But it’s still easy to access if you qualify for the VA loan program. Here are the steps you’ll need to follow:
1: Are you eligible for a VA cash-out refinance?
The best candidates for a VA cash-out refi have:
- A strong credit profile: Lenders have some discretion, but most borrowers need a credit score of at least 620 and a debt-to-income ratio (DTI) of 41%
- Enough home equity: If you don’t have enough home equity, there’s no way to benefit from this loan. Subtract your current mortgage balance from your approximate home value to measure your available equity
Missing either piece of this puzzle could mean it’s not the right time to get a VA cash-out refinance loan. For example, if you just closed on an existing VA loan and made no down payment, you probably won’t have enough equity to benefit quite yet.
2: Shop around with VA-authorized lenders
The VA guarantees home loans, making them more affordable, but it doesn’t lend the money. Instead, the VA partners with private lenders to provide this benefit to veterans and active duty service members.
You’ll have a lot of private lenders to choose from, including big national banks, small credit unions, and online lenders. Any lender can offer the best rate, so be sure to shop around.
3: Apply for your Certificate of Eligibility (COE)
Your Certificate of Eligibility is your ticket for accessing the VA’s home loan program.
If you already have a VA loan, you already have a COE and won’t need to apply for a new one. But if you’re using the VA loan benefit for the first time you’ll need to get your certificate. Apply for yours using this form, or let your lender do it on your behalf.
4: Apply for your loan and follow the lender’s directions
To speed your loan application process along, make sure you have copies of your W-2 forms and recent pay stubs nearby before you begin. It’ll also help to have your most recent mortgage statement available.
Your lender will order a new appraisal to find the current market value of your home.
Your loan officer should be available to help guide you through the application process. If the lender asks for additional documents, provide them as quickly as you can to avoid delays.
5: Prepare to close on the new loan
It can take almost two months to close on a VA cash-out loan. Your lender will schedule a closing date, and it should take care of most of the little details.
But you’ll still have some decisions to make and a lot of papers to sign. For example, will you pay the VA funding fee out of pocket or finance it into your loan? There will be some other closing costs to cover as you transition from your old loan to the new one.Verify your eligibility for a VA cash-out refinance loan (Dec 1st, 2022)
You may already know which home equity loan product is best for you and your circumstances.
But, if not, below is a quick analysis of each loan type. All of these products require you to put your home on the line and you could face foreclosure if you fall behind in payments.
Home Equity Loan (HEL)
A home equity loan provides a solid loan for conservative borrowers. It is:
- Safe and predictable — You’ll get fixed loan terms, fixed payments, and fixed rates (if you opt for a fixed-rate loan), so you know exactly what you owe each pay period and for how long
- Inexpensive to set up — typically HELs have lower closing costs than a refinance
Home Equity Line of Credit (HELOC)
A home equity line of credit works well when you need flexibility. It is:
- Not set in stone — borrow, repay, and borrow again up to your credit limit, much like you would with a credit card
- Inexpensive to set up — similar to a HEL and usually cheaper than a refinance
- More fluid — You pay interest only on your monthly balance instead of the full credit line. Most HELOCs have a variable interest rate
VA Cash-Out Refinance
The VA cash-out refinances your entire mortgage balance while also giving you access to home equity. It is:
- A chance for lower interest rates — Since iet replaces your primary mortgage loan, VA cash-out refinancing is a chance to get a lower interest rate
- Often the lowest “total cost of borrowing” — You can save on long-term interest costs by having only one VA loan with no ongoing mortgage insurance fees
- Expensive to set up — you’ll have to pay closing costs and other fees on a much larger loan amount, but those can be added to the new mortgage amount
Home equity loan
|Fixed-rate, term, and payments||Interest charged on lump sum|
|Lower closing costs||Inflexible repayment period|
|Receive a lump sum||Creates second monthly mortgage payment|
Home equity line of credit
|Draw funds as needed||Adjustable-rate could increase|
|Pay interest only on drawn funds||Draw period ends, usually after 5 or 10 years|
|Low or no closing costs||Creates second monthly mortgage payment|
VA cash-out refinance
|Can lower rate on entire mortgage balance||Can increase interest by extending loan term|
|No mortgage insurance required||Closing costs will be more expensive|
|Can refinance any other mortgage type||Could increase interest rate if you have a low rate already|
Does the VA have a home equity loan?
The VA does not offer home equity loans but VA borrowers can still access home equity through a VA cash-out refinance or a non-VA second mortgage.
Does the VA have a home equity line of credit (HELOC)?
The VA does not offer a home equity line of credit (HELOC). VA homeowners who want a HELOC can use non-VA loan products, though.
What are equity reserves on a VA loan?
“Equity reserves” is another term for home equity. It’s the part of your home’s value that you own outright because it exceeds the amount of money you owe your lender.
If you owed $100,000 on your mortgage but your house was worth $200,000, you’d have $100,000 in equity reserves. If you get a home equity loan or line of credit, you’ll use part of your equity reserves.
Can you lose your house with a home equity loan?
Yes, lenders who approve your home equity loan (or HELOC) will place a second lien on your home. This lien gives the lender the right to claim and sell your home if you default on the debt. Real estate liens last the life of the loan. When you pay off a loan, its lien expires.
What is the max LTV for a VA cash-out refinance?
The VA could allow you to borrow against all of your home value. In lender-speak, this means you can get a loan with 100% loan-to-value (LTV). But just because the VA is OK with 100% LTV doesn’t mean your lender will be. Be sure to ask your loan officer in advance if you’d like to tap all your home equity.
Can you refinance an FHA loan to a VA home equity loan?
Even if your current home loan is not a VA loan, the VA cash-out refinance can still work. The VA cash-out refinance can pay off any other loan type, including an FHA loan, while also giving you access to your home’s stored up value.
The best place to look for a home equity loan in today’s market may be at your local bank or credit union. But shop around online, too, so you can be sure you’re getting the best deal.
Home equity loans and lines of credit are not backed by the VA, so you’ll have to follow your lender’s rules. For example, you probably won’t be able to access more than 80 to 85 percent of your home’s equity.
The VA cash-out refinance is backed by the VA so it’s possible to tap all of your home’s equity without paying mortgage insurance. You’d have to refinance your entire mortgage balance to make this work.
To get a VA cash-out refi, shop around between several VA-authorized lenders online and in person.Verify your eligibility for a VA cash-out refinance loan (Dec 1st, 2022)