How a VA cash-out refinance works

If you’ve been honorably discharged from the military or are currently on active duty, your service to your country comes with a big benefit: the ability to buy a home with a no-down payment VA loan or refinance an existing mortgage.

To apply for a VA cash-out refinance, the first step is to get a certificate of eligibility (COE), which verifies that you meet the service requirements to take advantage of a VA loan.

In many ways, the process of getting approved for a VA cash-out refinance is similar to applying for a conventional refinance. VA loans aren’t provided by the Department of Veterans Affairs, but rather offered through a variety of mortgage lenders. You’ll need to meet a lender’s credit score and debt-to-income (DTI) ratio requirements and any other key standards to qualify. Be prepared to hand over an in-depth portrait of your personal finances.

In addition to evaluating you as a borrower, the lender needs to assess the value of the property, so you’ll also need to get an appraisal.

Note that VA cash-out refinances are reserved just for the home you’re living in, so if you’d like to refinance a loan for an investment property or second home, you’ll need to explore other options.

Requirements for a VA cash-out refinance loan

To qualify for a VA refinance, you must be an active duty service member or veteran who was honorably discharged and meets minimum service requirements, or a surviving spouse. You must also follow these criteria:

• Obtain your COE
• Meet your lender’s minimum credit score requirement, generally 620
• Meet your lender’s DTI ratio requirement, generally no more than 41 percent
• Demonstrate proof of income
• Pay the VA funding fee

VA cash-out refinance costs

A VA cash-out refinance can help you save money, but you’ll need to pay closing costs to do it. Compare at least three VA lenders and their respective origination fees and other charges so you have a sense of how much you’ll need to bring to the table.

In addition to closing costs, you’ll pay the VA funding fee, which varies depending on your status as a borrower:

• If you’ve never purchased a home with the VA benefit, the funding fee for a VA cash-out refinance is 2.15 percent of the loan principal.
• If you have used the VA benefit before — for example, if you have a VA loan and you’re refinancing it — the funding fee is 3.3 percent.

You can either pay this funding fee upfront or roll it into your loan. If you opt to roll it into the loan, just remember you’ll pay interest on that amount, too.

Alternatives to a VA cash-out refinance

A cash-out refinance isn’t the only option available to military service members. There’s also the VA IRRRL, or Interest Rate Reduction Refinance Loan, often called a VA streamline refinance. This option applies to homeowners who currently have a VA-backed loan, not those with conventional or FHA-backed mortgages. The benefit here is the ability to lock in a lower interest rate; you won’t be able to take cash out of your equity. The funding fee is much lower — just 0.5 percent — and there isn’t as much red tape, as you won’t need to undergo a credit check or get an appraisal on the home.

If you’re less concerned about lowering your interest rate and more focused on getting liquid cash, consider a home equity loan or home equity line of credit (HELOC). The interest rates on these types of financing can be higher, but you’ll avoid the VA funding fee, and these choices could be better suited for your situation overall.

Bottom line

A VA cash-out refinance can help you access cash, but you’ll need to be eligible, and prepared to pay the funding fee and other closing costs. If you don’t want to use your VA benefit to refinance but still need cash, consider a HELOC or home equity loan instead. If you don’t need cash but want to refinance your VA loan, consider a VA streamline refi.