Did you pass up your opportunity to use your VA home loan benefit when you bought your home? Guess what? You can still use it down the road. If you are ready to refinance, you can do so right into a VA loan. You won’t get the benefit of the VA IRRRL program that current VA borrowers get, but you can use the VA cash-out option.
Keep reading to learn how this loan program works.
The VA Cash Out Refinance
Refinancing into the VA cash-out refinance isn’t difficult. In fact, you’ll likely find that the procedures are just about the same you went through when you purchased the home. You will need to fill out a mortgage application that discloses all of the following information:
- Personal identifying information including your social security number
- Property information
Once you complete the application, the lender will ask for a variety of supporting documents including:
- Paystubs covering the last month of employment
- W-2s for the last 2 years from all income sources
- Tax returns, if applicable
- Certificate of Entitlement or enough information for the lender to pull it from the VA
The lender will look over your credit report, evaluate your income, and calculate your debt-to-income ratio to determine if you qualify for VA financing. If you do, they will then order an appraisal to determine the value of your home and the final loan amount you qualify to receive.
What are the Limits?
Unlike any other loan, you might hold right now, whether it’s conventional, FHA, or USDA, you can take out up to 100% of the home’s value with the VA cash-out refinance. This means whatever value the VA appraiser comes up with for your home, you can borrow that amount of money. One word of caution, here, though, some lenders prefer to cap the maximum LTV to 90% of the home’s’ value. If you find that you need 100% financing, you may have to do a little shopping around to find the right lender.
It doesn’t mean you have to borrow that much, though. You can borrow just enough to cover your outstanding principal balance or you can take cash out of the equity to use for home improvements, debt consolidation, or anything else you need.
Paying for the Cash-Out Refinance
Aside from the higher than normal LTV, the VA cash-out refinance also requires one other unique factor. You must pay a funding fee to get the loan. This is not a lender charge – the money goes straight to the VA. The VA holds the money in a reserve account, using the funds to pay back any lenders whose borrowers default on their loan. The VA guarantees 25% of each loan, which means on a $200,000 loan, they would need $50,000 to pay the lender back in the face of default.
Right now, the cash-out refinance funding fee equals 2.15% of the loan amount. You have the option to pay it in cash at the closing or wrap it into your loan amount. Keep in mind, though, if you wrap it into your loan amount, you will pay interest over the course of the loan’s term, which will increase the total amount you pay for the funding fee.
You don’t necessarily have to take cash out of your home’s equity to use the VA cash-out refinance option. If you are a veteran that did not use your benefit when you bought the home, you are a cash-out candidate. It can be a great way to get the maximum amount of financing available at a decent interest rate and minimal closing costs.