The Department of Veterans Affairs (VA) created the VA home loan to give veterans and active-duty servicemembers a shot at homeownership — one of the key factors in financial stability in the U.S.
But eligible servicemembers can do more than buy houses with a VA loan. They can also refinance existing VA loans to save money and take advantage of their home equity.
How? Through a 100% cash-out refinance VA loan.
What's in this Article?
What is a 100% VA cash-out refinance?
A 100% VA cash-out refinance loan can serve two purposes:
- Refinance to a lower interest rate or a longer repayment term: This can save you money on interest and/or reduce your monthly payments
- Access cash by borrowing against your home equity: You can turn your equity into cash that can be used for any purpose you choose, including consolidating debt, renovating your home, or paying for your children’s college tuition
Unlike most other cash-out refinance loans, which often cap the amount of equity you can borrow against at 80%, a VA cash-out refinance allows you to borrow against all of your home equity.
While some lenders set a limit of 90% loan-to-value (LTV), many VA lenders today still offer the full amount allowed by the VA: a cash-out loan at 100% LTV.
A word of caution: just because you can borrow against all of your equity doesn’t mean you should. Cash-out refinancing for 100% of your equity leaves nothing left to borrow against if an emergency comes up and you need access to fast cash. And, you may have to come up with cash to close if you need to sell. Typically, agent commissions and other fees add up to about 9% of the home’s price. You have to have at least this much equity to break even on a home sale.
Additionally, your new loan balance will be larger than your current mortgage. Your repayment period may also be extended if your refinance loan has a 30-year term. While an extended term can reduce your monthly payments, it also means you’ll be making mortgage payments longer than you had initially planned.
So, before you take out a 100% cash-out refinance VA loan, ask your lender what your payments will be and how much interest you’ll pay over the life of the loan. Having access to cash is great, and it can be used to fuel investments or other financial goals. But the loan is tied to your house, so your number one priority should be getting a payment that you can comfortably afford.
Related reading: Absolutely Everything to Know About the VA Home Loan
How does it work?
Now that we’ve covered the caveats, let’s look at how 100% VA cash-out refinance loans work.
The VA backs these loans, which is why they offer some of the lowest mortgage interest rates in the market. But you don’t apply with the government directly. For a 100% VA cash-out refinance, you contact a private mortgage lender that issues VA-backed home loans.
If you’re approved (and we’ll get to the qualifications in just a minute), the refinance loan will replace your existing mortgage. The new loan effectively pays off the current one, and then you get the difference between the two in cash.
Let’s say your home is valued at $350,000, and that you owe $275,000 on your current loan.
The difference between these two numbers — $75,000 — is your home equity.
Your 100% VA cash-out refinance loan amount could be as much as $350,000, the entire value of your home. The new loan would pay off your existing $275,000 loan balance, and then you would receive the remaining $75,000 (minus fees and closing costs) as a lump sum.
Again, you can spend the money any way you choose. But since it is debt on which you are paying interest, it’s smart to spend it on expenses with long-term benefits, such as home improvements or debt consolidation, or urgent costs such as medical treatments.
The requirements for a 100% cash-out refinance VA loan include:
- Equity in the home: The “cash-out” portion of this loan is backed by your home equity. If you recently purchased the house with a 0% down payment VA loan and you haven’t built up home equity yet, it would not be worth getting a VA 100% cash-out refinance
- VA loan eligibility: VA loans, whether purchase or refinance, are available to veterans, active-duty servicemembers, and some surviving spouses. All branches of the military, including the Reserves and the National Guard, can qualify for these loans. Eligibility is based on how much entitlement benefit you have available, and your lender can look that number up on your VA Certificate of Eligibility (COE)
- On-time payment history: VA guidelines require homeowners to have made six consecutive on-time payments on their current VA loans before applying for a VA cash-out refinance
- Primary residence: VA loans may only be used for a primary residence (the home you live in most of the year)
- Meet the loan criteria: VA lenders will check your credit score, debt-to-income ratio (DTI), and income stability to make sure you can afford the payments on the new loan. Many lenders look for a credit scores of 580, though some may hold more stringent requirements for 100% cash-out loans.
These first three qualifications on this list are straightforward enough: Either you’re a qualifying veteran with home equity who lives in the home, or you aren’t.
But there’s more nuance with the fourth requirement because mortgage underwriting is complex, and rules can vary among different lenders who offer VA loans.
“Unlike an IRRRL (Interest Rate Reduction Refinance Loan), a VA cash-out refinance will take credit, residual [income] and debt-to-income ratios, and employment history or steadiness of income into account,” said Todd Loughry, a loan officer with Fairway Independent Mortgage Corporation (Fairway owns Home.com).
The VA itself doesn’t set a minimum credit score or debt-to-income ratio (DTI) for cash-out borrowers, but VA lenders do. That’s why it’s important to talk with several lenders if you are initially turned down, or choose a lender that will help you get your finances where they need to be in order to get approved.
Related reading: VA Home Loan Requirements: Who Qualifies for this 100% Loan?
How does this loan compare to other refinance loans?
Homeowners who want to refinance their mortgage loans have many options, including rate-and-term refinances. These loans can lower your interest rate or change your loan’s term to save on interest over time.
But only a cash-out refinance allows you to take cash out of the home while also refinancing your mortgage.
Among cash-out refinance loans, only the VA’s option allows homeowners to borrow up to the full value of their homes. Other loan programs limit your loan’s size to 80% of your home’s value.
Although the VA will insure a loan size up to 100% of your home’s value, not all VA lenders will approve a loan that large. If you’re counting on taking a loan for the full appraised value of your home, Loughry has some advice:
“The best plan is to make sure you are current on your debt obligations and can show income that is steady and likely to continue,” he said. “I suggest reaching out to a loan officer to get an assessment of your current situation if you have any questions about your readiness to do a VA cash-out refinance.”
A VA cash-out refinance is a good idea when you can benefit from both of the loan’s offerings: refinancing to more affordable terms and the option to take out cash from your equity.
If you only really want to lower your interest rate or reduce your monthly payments, you might consider a VA IRRRL, otherwise known as a VA streamline refinance. These can be easier to qualify for, and you leave the equity available if you really need it down the road.
Or, if you already have a competitive interest rate and your optimal loan term but you need to borrow from your home equity, you might consider a home equity loan or home equity line of credit (HELOC) instead, Loughry said.
“If the cash-out refinance is going to raise the interest rate, then it’s worth looking at the math for both options,” he said. “There is no sense in moving a sizable loan amount to an unnecessarily high rate to access a small amount of funds.”
A 100% cash-out refinance VA loan comes with closing costs, just like a VA purchase loan — or any other type of home loan, for that matter.
You may also owe an upfront VA funding fee, though some veterans with service-related disabilities are exempt from the funding fee. Fortunately, VA loans do not include an annual mortgage insurance requirement, only the upfront funding fee.
If necessary, you can roll many of these costs into the loan itself, though this will reduce the amount of cash you’ll receive.
100% VA cash-out refinance FAQs
The maximum loan-to-value ratio (LTV) on a VA cash-out refinance is 100%, which means you can borrow against the full equity in your home, though many lenders today only go up to 90% LTV. Additionally, your lender will determine your LTV based on your financial circumstances, including your income and monthly debts. They may approve you for a lower LTV if they are concerned that you could not make the monthly mortgage payments on a 100% VA cash-out refinance loan.
The VA offers a 100% cash-out refinance option for eligible borrowers (eligibility is based on military service, available entitlement benefit, and the borrower’s finances). Some lenders set a VA cash-out refinance limit of 90% LTV. Most other cash-out refinance loan options only allow you to borrow against up to 80% of your home’s equity.
The VA requires homeowners to wait 210 days and make six consecutive on-time payments on their existing VA loans before starting a new cash-out refinance.
There are a number of considerations to make when deciding whether a 100% cash-out refinance VA loan is the best fit for your circumstances. That’s why the first step is talking to a lender about your eligibility and getting their feedback on which paths you can take to your goals.
“In the end, it’s just a math equation,” Loughry said. “A good loan officer should be able to present you options to consider, to determine if any refinance best suits your interests.”
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.