The VA Cash-Out Refinance is a powerful financial tool that allows eligible veterans, service members, and surviving spouses to tap into their home’s equity. Unlike the streamlined VA IRRRL, this refinance involves a complete replacement of your current mortgage to provide you with tax-free cash at closing.
I. What is the VA Cash-Out Refinance?
Definition and Purpose
A VA Cash-Out Refinance allows you to replace your existing mortgage with a new, larger VA-backed loan to take a lump sum of cash out of your home’s equity. This money can be used for any legal purpose, such as:
- Paying off high-interest debts (credit cards, auto loans, etc.).
- Funding major expenses like education or retirement.
- Financing major home improvements or repairs.
Source Loan Flexibility
This refinance is the only VA option that allows you to convert any loan type (Conventional, FHA, USDA, or an existing VA loan) into a new VA-guaranteed mortgage. This is a popular way for veterans who originally used a conventional loan to gain the benefits of VA loans Kansas City, including competitive interest rates and no Private Mortgage Insurance (PMI).
The Key Advantage: High LTV
The VA allows borrowers to finance up to 100% of the home’s appraised value. While the VA permits 100% LTV, many individual lenders set their own, more conservative maximum at 90% LTV.
II. Eligibility and Full Underwriting Requirements
Because the Cash-Out Refinance involves a new, larger loan, it requires full underwriting similar to a VA Purchase Loan.
- Mandatory New Appraisal: A new VA appraisal is required to determine the home’s current market value.
- Full Credit and Income Review: Lenders will conduct a thorough review of your financial stability, verifying income and analyzing your Debt-to-Income (DTI) ratio.
- Occupancy Certification: You must certify that you will occupy the property as your primary residence.
- Loan Seasoning: You must have made at least six consecutive monthly payments on the loan being refinanced.
III. The VA Cash-Out Funding Fee and Entitlement
Funding Fee
The funding fee for a Cash-Out Refinance is based on your usage history:
- First-Time Use: 2.15% of the loan amount.
- Subsequent Use: 3.30% of the loan amount.
You can view a full breakdown of exemptions on our VA Funding Fee page.
Exemption: Veterans receiving compensation for a service-connected disability are typically exempt from the funding fee (0.00%).
Entitlement Impact
The new, larger loan amount will use more VA Entitlement. Your lender will check your VA Certificate of Eligibility (COE) to confirm your available guarantee.
IV. Calculation: How the Cash-Out Amount is Determined
The amount of cash you receive is determined by your home’s appraised value minus your existing payoff and VA loan closing costs.
Scenario: Appraised Value of $400,000, Lender’s Max LTV of 90%, with an Existing Mortgage Payoff of $250,000.
| Step | Calculation | Amount |
|---|---|---|
| 1. Maximum New Loan Amount | $400,000 (Value) × 0.90 (LTV) | $360,000 |
| 2. Total Obligations | Existing Payoff + Fees | $258,000 |
| 3. Net Cash-Out Received | Max Loan – Total Obligations | $102,000 Cash Back |
V. VA Cash-Out Refinance vs. Home Equity Loan (HEL/HELOC)
The VA Cash-Out Refinance provides unique benefits compared to obtaining a secondary loan against your home’s equity:
| Feature | VA Cash-Out Refinance | Home Equity Loan (HEL/HELOC) |
|---|---|---|
| Loan Structure | Replaces original mortgage with a new VA first mortgage. | Secondary loan (second mortgage) behind the original loan. |
| LTV Limit | Up to 100% (lender dependent). | Typically capped at 80% to 90% LTV combined. |
| Interest Rate | Low VA rates apply to the entire balance. | Higher interest rates typically apply to the second loan. |
VI. Frequently Asked Questions (FAQ)
Q: Can I refinance an FHA loan to a VA Cash-Out?
A: Yes. This is a popular way to eliminate lifelong FHA mortgage insurance while taking cash out.
Q: Can I use the Cash-Out Refinance on an investment property?
A: No. VA loans are strictly for primary residences. If you rent the home out, you cannot use the Cash-Out Refinance (you would use the VA IRRRL, but you cannot receive cash back).
Q: How long does the process take?
A: Because a full appraisal and underwriting are required, it typically takes 30 to 45 days from application to closing.