If you have debts that either make you live paycheck-to-paycheck or that prevent you from securing the loan approval you need, your VA home loan benefit may help.
There are two ways you can use your VA benefit to get out of debt. The most common is the VA cash-out refinance, but you may even be able to do it with a VA purchase loan. We’ll discuss both options below.
Eliminating Debts With a VA Cash-Out Refinance
The VA cash-out refinance is the typical way that veterans get out of debt. Once you have some equity in your home, you can tap into it with a VA cash-out refi. This loan provides you with up to 100% of the value of your home, which is rare for a cash-out refinance.
The loan proceeds will first pay off the outstanding balance of your existing VA loan. If you are paying closing costs or the funding fee with these proceeds, they will also take away from the funds. The remaining funds, though, can be used to pay off your debt.
You can either have the lender send the funds directly to your creditors at the closing or you can accept the funds and pay them yourself. In some cases, the lender may make this decision. This is especially common in situations where your debt ratio is high and your approval is dependent on you paying off the debts.
Keep in mind, when you use your VA loan to pay off debts, you take away from your home’s equity. If you borrow 100% of the home’s value, you have 0% equity once again. It’s important to weigh the pros and cons of using your home’s equity to do this.
Are you in over your head and this is the only way out? Will you save a significant amount of money on interest costs by refinancing this way? Remember, you will pay interest on everything you roll into the loan for the entire term. If you take a 30-year term, that’s 30 years of interest on a debt that you might have paid off in less than 30 years. Again, just weigh everything carefully so that you make an informed decision.
Eliminating Debts With the VA Purchase Loan
It might seem strange that you can use your purchase loan to get out of debt. Technically, you aren’t using the funds from the loan itself. The VA purchase loan can fund 100% of the purchase price. You may also be able to roll in the funding fee, but that’s all. You cannot roll your closing costs into the loan.
So how can the VA loan help you with your debts? It’s actually the seller in the transaction that can help, but only VA loans allow this step. Not only can the seller pay your closing costs, he or she can also give you up to a 4% seller concession. This seller concession can be used for just about anything, including paying off your debts.
Why would a seller want to help you pay down your credit card debt? It seems odd, but if your financing is contingent on you eliminating some of your debts, the seller may be motivated to help. If he or she is getting enough money for the home (the amount they hoped to get), they may be willing to concede the ‘extra’ money to help you get approved for the loan.
In order for this situation to work, you must negotiate it before you sign the purchase contract and it must be stated in the contract exactly how the seller concession funds should work.
Your VA home loan benefit provides several opportunities to get out of debt with either a refinance or a purchase loan. If you do plan to use the purchase loan with seller concessions, you may have to shop around to find a willing lender as it’s not a common scenario.