Need extra cash to fund a home improvement project? Eager to pay a lower interest rate and reset your mortgage loan terms?
If you’re an eligible active-duty military member, veteran, or surviving spouse of one, your best option could be a VAcash-out refinance loan. This loan replaces your current mortgage with a new one – even if you don’t already have a VA loan.
Take the time to learn more about veterans loan requirements when pursuing a cash-out refinance, how to qualify for a VA loan refi, associated costs, VA funding fee rules, and the steps involved.
What is a VA cash-out refinance?
A VA cash-out refinance is a loan for qualified applicants, including veterans, active-duty service members, and certain surviving spouses. It allows them to replace their existing mortgage loan with a new one while liquidating extra cash from their accrued home equity.
This cash is paid in a lump sum at closing.
...in as little as 3 minutes – no credit impact
How does a VA cash-out refinance work?
This VA loan refinance option replaces your existing mortgage with a new VA-backed loan with different terms, including a new interest rate and loan duration.
Your existing mortgage doesn’t even need to be a VA mortgage loan to qualify. You could refinance up to 100 percent of your home’s appraised value, depending on your lender’s rules and policies. At closing, you walk away with the cashdifference between the new loan amount and the old balance.
“For example, if your house is worth $300,000, and you still owe $180,000 on the mortgage loan, you could refinanceinto a new VA cash-out refinance loan for $240,000 and pocket the $60,000 difference,” explains personal finance expert Baruch Mann, CEO of The Smart Investor.
This cash can be used for virtually any legal purpose, including paying for home renovations, tuition, medical bills, a wedding or other large event, or paying down high-interest debt.
Keep in mind that your house is used as collateral to secure the new loan, meaning you could risk losing it to foreclosure if you can’t repay your mortgage debt.
Pros and cons of a VA cash-out refinance
As with any financing option, there are benefits and drawbacks to choosing a VA cash-out refinance loan. Let’s explore each of these in more detail.
VA cash-out pros
Likely the biggest advantage of a VA cash-out refinance is access to your home’s equity at a lower interest rate than credit cards or personal loans would charge.
Because the Department of Veterans Affairs (VA) insures part of the loan, participating lenders face less risk and can usually offer better terms. As a result, VA cash-out refinances often come with lower interest rates than comparable conventional or FHA cash-out refinance programs.
Of course, it makes the most financial sense to refinance when you can lock in at a lower interest rate than you are currently paying on your mortgage loan.
“Also, if you have high-interest debt to pay off, a VA cash-out refinance has the potential to reduce your total borrowingexpenses. That’s because it can pool together repayment of these high-interest debts into a single loan product, which will likely be at a lower interest rate. Plus, you can access vast amounts of cash without having to use unsecured loans or lines of credit,” notes Paul Ferrara, a senior wealth counselor at Avenue Investment Management.
You could benefit, as well, from a reset to a shorter-term – such as going from an existing 30-year mortgage loan to a new 15-year VA home loan. Doing so would mean paying off your debts much more quickly and saving thousands otherwise spent on interest, although your monthly mortgage payments would likely be higher.
“In addition, because VA loans require no private mortgage insurance, your monthly payment can be relatively lighter compared to other refinancing options, even if your loan-to-value ratio is high,” says Mann.
...in as little as 3 minutes – no credit impact
VA cash out cons
Then again, there are some disadvantages to getting a VA cash-out refinance.
“The biggest drawback is that you are taking on more debt by increasing your mortgage balance and extending repayment over a greater time if you choose a longer term, which may lead to paying more interest in the long run,” cautions Dennis Shirshikov, a professor of finance and economics at City University of New York/Queens College.
There’s this to ponder, too: You’re borrowing against the equity you’ve built up in your property and converting it to cash, which means your loan balance increases and your equity (ownership stake) decreases. Having less equity, it will take longer for your ownership share to grow again via monthly payments or price appreciation.
And because you now owe more on your home, there’s more exposure if neighborhood home values decrease. If area home prices drop steeply, you could end up owing more than what your home is worth, which makes it more difficult to refinance or sell your property later.
Consider, as well, that any short-term financial gain from getting cash at closing can easily be offset by the closing costsyou’ll need to pay on this refinance. Expect to fork over between 2 to 5 percent of the new loan amount in closing costs.
Lastly, there’s also the risk of foreclosure in the event you do not repay your loan as agreed upon. This is true for FHAand conventional loans, too.
How to qualify for a VA loan
To be eligible for a VA cash-out refinance loan, you’ll need the following:
- Stable income
- Sufficient home equity – often at least 10 percent, although some lenders will allow you to cash out up to 100 percent of your home’s appraised value
- Favorable credit score – typically a credit score of 620 or higher
- A debt-to-income ratio ideally no greater than 41 percent (preferred by many participating lenders)
- A new home appraisal
- Proof that you can clearly benefit from the refinance, as evidenced by, for example, future lower monthly payments
- A VA Certificate of Eligibility (COE)
“To get your COE, you need to demonstrate that you meet basic VA loan eligibility by either being an active duty service member or a veteran of the U.S. Military with either 90 consecutive days of service during wartime, or 181 days of service during peacetime, or six years in the National Guard or Reserves. Or, you can be an eligible surviving spouse of an eligible veteran,” says J. Keith Baker, professor of accounting and finance at Dallas College in Irving, Texas.
You’ll also be required to occupy the home being refinanced as your primary residence.
Steps to get a VA cash-out refinance loan
Here’s a breakdown of what you’ll need to do, step-by-step, to get a VA cash-out refi:
Choose a lender
Shop around among different VA-approved lenders and request rate quotes and loan offers.
Request your COE
This official document from the Department of Veterans Affairs confirms your eligibility for VA benefits. It verifies to lenders that you meet service requirements, lists the entitlement amount, and may show VA funding-fee exemptions, if applicable.
Gather necessary paperwork
Your VA home loan lender will likely need a government-issued photo ID (such as a driver’s license, passport, or military ID), Social Security number, recent pay stubs, W-2s from the past two years, federal tax returns, proof of any additional income (such as VA disability, pensions, or rental earnings).
Also, gather recent bank statements for checking, savings, or retirement accounts, statements for other loans or debts(credit cards, auto loans, or student loans), property-related documents including your current mortgage statement, homeowners insurance policy, and a copy of your property tax bill.
Officially apply
Complete and submit the application for the VA cash-out refinance loan online or on paper.
Have an appraisal done
“Your lender will order an appraisal to confirm your home’s value, which determines how much equity you can access,” says Mann.
Await an underwriting decision
It may take several days to get a verdict from the lender. Better Mortgage's transparent loan process will keep you updated along the way.
Close on the loan
On closing day, you’ll sign all the important documents and officially close.
Receive your cash
Your liquidated equity will likely be disbursed to you a few days after closing.
Costs for a VA cash-out refinance
As mentioned earlier, you will likely pay closing costs that equate to between 2 and 5 percent of your loan amount. For a $200,000 loan, that's $4,000 to $10,000.
These costs include lender origination fees or discount points, third-party fees such as the credit report, title search and title insurance, and appraisal, as well as recording and transfer fees, prepaid expenses for taxes and homeowners insurance, and any other administrative or settlement charges required to finalize the loan.
“Furthermore, unless you are exempt due to a service-connected disability, the VA will separately charge a funding fee – the cost of which will depend on whether VA benefits are being used for the first time or re-used,” adds Shirshikov.
If it’s a first-time use, your VA funding fee will be 2.15 percent versus 3.3 percent for subsequent uses.
VA cash-out refinance FAQs
What’s the difference between a VA cash-out refi and a VA streamline refinance?
A VA cash-out refinance allows you to tap into your home’s equity to receive cash while a VA streamline refinance – also known as an Interest Rate Reduction Refinance Loan, or IRRRL – is designed only to lower your existing VA loan’s rate or change the loan term.
A VA cash-out refi is more flexible but involves a full credit check, home appraisal, and income documentation. The streamline refi is quicker, with fewer requirements and less paperwork, but no equity is accessed and only borrowers who already have a VA home loan can apply.
What credit score requirements does the VA catch-out refinance have?
The Department of Veterans Affairs (VA) does not set a strict minimum credit score, but most participating lendersrequire at least a 620 credit score to qualify for a VA cash-out refinance loan. A higher score – such as 680 or above – can help you secure a lower interest rate.
Some lenders may approve lower scores if you have strong income, low debt, or significant equity in your home. For instance, if you have a score of 600 but very low debt, you might still qualify – although possibly at a higher interest rate.
How long do you have to wait to get a VA cash-out refinance?
Most participating lenders require that you wait at least 210 days from your first mortgage payment or make six monthly payments on your existing loan – whichever is longer – before applying for a VA cash-out refinance.
This ensures that the loan has “seasoned” and helps prevent rapid refinancing, helping veterans avoid paying closing costsrepeatedly. This same requirement also applies if you’ve recently refinanced.
Is now a good time to refinance?
If a new home loan can improve your financial position, it's a good time to refinance. Getting a lower rate, eliminating mortgage insurance, accessing equity – these are all ways a new loan could improve on the current mortgage. But for some homeowners, a loan modification or a second mortgage can perform better than a full refinance.
The bottom line
A VA cash-out refinance loan remains one of most versatile and generous loans you can find. Only eligible veterans and active duty service members can use it.
It’s wise to have a plan in place for exactly what you’ll do with the extra cash from this VA loan, how long it will take you to pay off the new loan, and your short-and long-term housing plans.
Carefully run the numbers, measure closing costs, compare multiple lenders, and borrow only enough to support your long-term financial stability.
Starting with a preapproval from Better which can show your home loan options without a hard credit check.
...in as little as 3 minutes – no credit impact