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Lesson 10.5

VA Cash-Out Refinance Loans

Cash-Out Overview

The VA's Cash-Out refinance loan gives qualified veterans the opportunity to refinance their VA or non-VA loan into a lower rate mortgage and extract cash from the home's equity. This refinance option is open to qualified homeowners with and without VA loans.

The Cash-Out shouldn't be confused with a home equity loan, which is a second loan that runs alongside your current loan, or a home equity line of credit (HELOC). The VA Cash-Out refinance loan replaces your existing mortgage instead of complementing it.

The process for obtaining a Cash-Out refinance looks similar to the process for getting a VA purchase loan, from credit benchmarks and underwriting to the VA appraisal and more. This refinance is the only way for VA homeowners to extract cash from equity using the VA loan benefits.

There are also some key differences between the VA Cash-Out refinance and the VA Interest Rate Reduction Refinance Loan (IRRRL) when it comes to things like occupancy, closing costs and seasoning periods.

VA Cash-Out Underwriting & Appraisal

Lenders will document credit, income, employment and assets for borrowers seeking a Cash-Out refinance. Guidelines and requirements can vary by lender when it comes to things like minimum credit score, maximum debt-to-income ratio, derogatory credit and more.

At Veterans United, prospective borrowers will need to secure approval through an Automated Underwriting System (AUS) in order to move forward with a VA Cash-Out refinance. We do not allow manual underwrites for Cash-Outs.

Unlike the IRRRL, the Cash-Out comes with no seasoning requirements, meaning veterans don’t need to have made a certain number of months’ worth of mortgage payments in order to qualify.

Homeowners will also need a full VA appraisal, which can include things like pest inspections, well water tests and other health, safety and marketability assessments.

At Veterans United, homeowners seeking to turn a construction loan into a permanent VA mortgage will need to own the lot on which the home is built in order to pursue a Cash-Out refinance. Otherwise, we would treat this as a VA purchase loan.

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VA Cash-Out Occupancy

Veterans need to have an active VA loan on the property in order to secure a Cash-Out refinance. You wouldn’t be able to get one if you own the home free and clear.

In addition, the Cash-Out refinance comes with the same occupancy requirements as VA purchase loans.

The IRRRL requires only previous occupancy to satisfy the VA and lenders, but veterans looking for a Cash-Out must intend to occupy the home as their primary residence.

Entitlement & Cash-Out Refinance

With an IRRRL, the new loan does not require the use of new or additional VA loan entitlement. But Cash-Out borrowers will need to use new or additional VA loan entitlement in order to secure the loan.

The Cash-Out refinance is a new mortgage loan that repays the original VA loan in full, which allows borrowers to restore the entitlement utilized on that purchase.

But there could be additional entitlement required depending on the specific circumstances.

Closing Costs & Loan-to-Value (LTV)

Closing costs and fees can vary on Cash-Out refinance, similar to a VA purchase loan.

Borrowers who are not exempt will also pay the VA Funding Fee, which is higher on a Cash-Out than on the IRRRL. But this is a fee that homeowners can roll into their loan.

Homeowners with sufficient equity can pay their closing costs and fees from the proceeds of their refinance. But the total of these cannot exceed the maximum loan amount:

  • Paying off any liens, including the current mortgage
  • Paying fees and charges, other than the VA Funding Fee
  • Reasonable discount points to lower the interest rate
  • Cash back to the veteran

Guidelines and policies will vary when it comes to maximum loan-to-value, too.

At Veterans United, the max LTV is 100 percent for loans at or below the VA county loan limit. Borrowers who want more than $50,000 in cash at closing are limited to a 90 percent loan-to-value ratio. For loan amounts above the county loan limit, the max LTV is 90 percent as well.

The funding fee can be financed on top of the maximum loan-to-value ratio.

Rate & Term Refinances

Homeowners are not required to get cash back with a VA Cash-Out refinance.

Veterans with non-VA loans can use the Cash-Out option to refinance into the VA program and obtain what’s known as a rate and term refinance.

This is a basic refinance that alters either the interest rate, the mortgage term or both.

Time to Recoup

Lenders may have guidelines regarding how long it takes a borrower to recoup the costs and fees associated with getting a Cash-Out refinance. Recoupment looks at how much a refinance saves the veteran and how long it takes for those savings to pay for the costs and fees of their new loan.

For example, if the Cash-Out costs and fees total $6,000 and the new loan saves the homeowner $100 per month, this borrower would recoup those costs in 60 months (6,000 / 100).

At Veterans United, the recoupment period for a rate and term refinance cannot exceed 84 months.

For a true Cash-Out refinance, the time to recoup can exceed 84 months, but the file will need to document positive reasons to support the longer time frame, such as:

  • Refinancing an exotic mortgage product into a fixed-rate mortgage
  • Reducing the loan term
  • Providing a specific cash-out benefit for paying off debts

That’s not an exhaustive list. There may be additional net tangible benefits to support a longer recoupment period.

Texas Cash-Out Refinances

The state of Texas has unique requirements and restrictions when it comes to Cash-Out refinances.

Talk with a Veterans United loan specialist if you’re considering a Cash-Out refinance on a property in Texas.

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