VA Cash Out Loan Facts for 2021
What is a cash-out refinance? A cash-out refinance (or cash-out refi) replaces your current home loan with a new home loan according to the VA home loan program. This new loan equals more than you owe on your home, which means that you get to pocket the difference. So, if you owe $100,000 on your home and you get a cash-out refinance loan, you will receive a loan for more than $100,000. This is great for you! For both military members and Veterans eligible for VA home loan benefits, this type of loan may offer more options for refinancing than conventional loans.
In this article, we’ll explain current information on cash-out refinance loans. Every year is a little bit different, so it’s important to stay up-to-date on the facts about cash-out refinance loans. Read on to learn more!
What is a VA Cash Out Refinance Loan?
At this point, we’ve explained that a cash-out refinance replaces your existing mortgage with a new one that allows you to keep some extra cash. But did you know that there are two types of cash-out loans?
A type I cash-out refinance doesn’t actually get you any cash to pocket when you close the loan. It’s called a cash-out refinance more because of convention than anything else. However, this is often still a worthwhile decision, because it lowers monthly mortgage payments. According to the Department of Veteran’s Affairs, one loan term is that you also must be able to cover the costs of the refinance within three years of closing. Costs could include closing costs, your VA funding fee, and mortgage insurance. This means that if you pay $2,000 in fees to refinance, the refinance must save you at least $2,000 on your monthly payments in the three years after closing. You can also refinance a non-VA loan to a VA loan with a type I cash-out refinance, which in most cases will also save you money.
A type II cash-out refinance is the kind of refinance option that we’ve already described. When you get this kind of loan, you receive a larger loan amount than you need to pay off on your home, so you pocket the difference. Like type I cash-out refinances, you can get a type II cash-out refinance on a non-VA loan, converting it to a VA loan and pocketing the difference.
What Are the VA Cash Out Loan Requirements?
To qualify for a VA cash-out refinance, you need to demonstrate that you qualify for a VA loan and provide your lender with financial documentation. To prove that you are a qualified Veteran, you’ll need a Certificate of Eligibility. To get one, you can apply at eBenefits, a service of the VA. You can check the VA website to see if your military service or service-connected disability qualifies you for VA benefits. You’ll also be asked for information on your income, debt, and taxes.
Your credit score and debt-to-income ratio also matter when applying for a cash-out refinance. Many lenders prefer credit scores of 680 or higher, but at HomePromise, we do loans for people with challenging credit histories! If you’re worried about qualifying with a low credit score, contact us now at 1-800-720-0250 to apply for free!
Is a VA Cash Out Loan a Good Idea?
On paper, a VA cash out loan sounds great. But anytime you refinance, it takes time and effort from you. So what, besides that bonus cash, makes the cash-out loan a good idea?
One great reason to get a cash-out refinance loan is the fact that you can actually consolidate debt this way. Here’s how: when you get that cash, you can use it to pay off debts like high credit card debt. Of course, you will still have some debt, since your mortgage represents what you still owe on your house. But rather than having multiple sources of debt to manage, you can pay off other debts with the cash and focus on your mortgage debt. Plus, the interest rates on your mortgage payments will almost always be lower than other debt payments, like credit card debt. Now you can be paying off debt with just one payment a month, toward your mortgage. In the end, this saves you money and simplifies your financial situation.
Another great reason to get a cash-out refinance loan is because you can use that cash to add value to your home. Whether you want to refresh the design of your home or renovate your kitchen, extra cash allows you to make home improvements. Plus, with those updates, your home is worth more!
Of course, you can also use cash from a cash-out refinance loan at your discretion. Maybe you want to use some to support family members like parents or grandparents, or you’re hoping to put it into a business venture. Regardless, it’s hard to argue with a loan that gets you cash at closing.
What is the Max Cash Out On A VA Cash Out Loan?
Your max cash-out typically depends on your loan-to-value ratio. A loan-to-value ratio is based on how much of your home you already own. In other words, it depends on the equity in your home. For example, if your home is worth $350,000 and your current mortgage is for $200,000, your mortgage is for 57% of your home value. That means that the other 43% of your home value is officially yours. When you get a type II cash-out refinance, you’ll get a mortgage refinance for a greater percentage of your home value. So if you go from your $200,000 mortgage to a $250,000 mortgage, you’re receiving a loan that is 71% of your home value. The loan-to-value ratio for your refinance would be 71%. If you choose to make a down payment, that will lower your loan-to-value ratio.
Every lender is different, but most VA lenders will not approve a cash-out refinance that has a loan-to-value ratio of higher than 90%. In fact, many lenders will actually cap their loan-to-value ratio at a number even lower than that. Why would lenders do this? Because a high loan-to-value ratio is riskier, simply because it is more money. A higher loan-to-value ratio also means that you are making a smaller down payment, which is also riskier for the lender. The VA guarantees your lender a certain amount of any loan if the borrower defaults, but there is a limit to how much a lender could get back.
At HomePromise, we approach things a little differently. We are actually willing to make 100% loan-to-value loans, which means that if you qualify, you could get a cash-out refinance for 100% of your home value without making a down payment. In the example above, that would mean you could receive $350,000 at closing.
Get a 100% VA Cash Out Loan – Refinance with Us!
So how do you know if you qualify? It’s fast and easy to find out. You can call us at 800-720-0250 to speak with a cash-out refinance expert. Applying with us is always free, so you have nothing to lose by giving us a call! We are committed to working with you and understanding your unique situation. That’s the HomePromise Way.