You invested in your home and now you want to take the cash out. You heard there is a VA Streamline Refinance, are you eligible? Unfortunately, in order to cash-out on a refinance, you cannot use the streamline program. It is strictly reserved for certain situations, none of which include taking cash out of the home.
What is the Streamline Refinance?
The VA Streamline Refinance is a simplified refinance program. It allows veterans to lower their payment without verifying income, employment, credit, or the value of their home. It does not, however, allow you to take cash out of the home. The program is only for borrowers who stand to save money by refinancing. An exception to the rule is borrowers who want to refinance out of an adjustable rate loan. The VA allows this, even if the payment increases, because a fixed rate loan is less risky. The catch is your payment cannot increase more than 20 percent. If it does, you get put in the same category as those who need cash out of their home.
How to Cash-Out with a VA Refinance
The good news is you can still use your VA benefits and take cash-out of the home. The bad news is it is not a streamlined process. This means you must verify everything on your loan application. Lenders cannot just take your word for the fact that you have enough money to cover your new payment. Instead, they need the following documents:
- Credit report verifying your credit score
- Paystubs showing your last month’s worth of income
- W-2s for the last 2 years showing your total income over the year
- Tax returns for the last 2 years if you are self-employed or work on commission
- Verification of your employment
- Appraisal report verifying the value of your property
Flexible Loan Amounts
While it may be bad news that you cannot use the streamline process available to veterans, there is good news. The cash-out refinance allows loan-to-value ratios up to 100% of the value of the home. This is unheard of with any other loan program. Usually, you cannot borrow more than 80% of the value of the home. This leaves lenders with a 20% cushion, should you default on the loan.
Because the VA guarantees the loans, through, lenders can be a little more flexible. You will likely find that most lenders allow an LTV up to 90%, though. If you need the full 100%, you will have some shopping around to do. Every lender can have their own overlays on top of what the VA requires. Some lenders are stricter than others.
The Funding Fee
Just like you paid a funding fee when you took out your original VA loan, you must pay it again. With a cash-out refinance, you pay the same fee you paid originally – 2.15%. If you were to not take cash out of the property and instead, used the streamline program, you would only pay 0.5%. This is quite a difference, so really make sure you need that cash. For every $100,000 borrowed, the difference is $1,650 in a cash-out refinance and streamline refinance. You can pay the funding fee up front or roll it into the loan. This does help make it more affordable, especially if you are in need of cash.
The Appraisal Process
Unlike the streamline loan, the VA cash-out loan requires a full appraisal. The lender may not use the original purchase price of the home for valuation. The lender must know the current value to determine if there is enough value to get the cash from the property. Lenders will usually leave some type of cushion, as we discussed above, even though the VA guarantees the amount. Because you need a full appraisal, you can expect it to cost between $350-$500 for this service.
Other Ways to Get Cash
If you want to take advantage of the VA Streamline, there are a few ways you can get cash from the home. First, take advantage of the streamline loan. If you stand to save money every month, this is the easiest way to put money in your pocket. With a lower mortgage payment, you instantly have more money. However, if you need a large sum right away, you can apply for a home equity loan. The process to get this loan is usually much easier than a cash-out loan. You can often take out up to 80% of the value of the home. If you have a good amount of equity in the home, this is a good option. You don’t pay a funding fee and the closing costs are usually fairly low.
Deciding whether you should take a VA Streamline loan or a cash-out loan is a personal decision. Talk to several lenders about both options. This way you can have quotes for both programs. Compare the fees and how long it will take you to pay them off. See if it makes sense to take the cash or to just streamline refinance and save money every month. You have other options to get the money out of the home if you need to, but you may even benefit from a small personal loan if you need the money now. This way you leave your equity untouched and you don’t pay 2.15% plus the closing fees to get the money you need.
If you must tap into the equity, though, the VA cash-out refinance is a product that is available to veterans. Make sure you prepare yourself ahead of time by enhancing your credit score and lowering your debt so you are as attractive as possible to the lender. The higher your credit score and the lower your debt ratio, the better your chances of approval. Even though the VA guarantees the loans, lenders still have strict guidelines in order to reduce the risk of default.