If you have equity in your home and you are a veteran, you may wonder if you can get a VA home equity loan. The home equity loan is a second mortgage that allows you to tap into your home’s equity. Unfortunately, though, the VA doesn’t have an official mortgage like this. But, there is a way to tap into your home’s equity with your VA benefits.
The VA Cash Out Mortgage
Rather than a VA home equity loan, there is a VA cash-out mortgage. This loan gives you access to your home’s equity with your first mortgage. In order to obtain your home’s equity, you’ll need to refinance your first mortgage, though. The VA doesn’t offer second mortgages.
Here’s how it works.
You can refinance with a VA cash-out mortgage up to 100% of the home’s value. If your home is worth $300,000, you can borrow up to $300,000. You must qualify for the loan, but the possibility is there. Qualifying for the VA cash-out mortgage isn’t difficult either. You need:
- A 620 credit score – This is the average credit score required. The VA doesn’t have an actual credit score requirement, but the average lender requires at least a 620.
- A 41% max total debt ratio – The VA doesn’t focus on debt ratios, but they do request that your total DTI doesn’t exceed 41%. This means your total expenses, including the new mortgage payment, doesn’t exceed 41% of your gross monthly income.
- Stable income and employment – You should have a 2-year history at the same job or at least within the same industry with stable or increasing income over the last 2 years.
- No defaulted federal loans – You cannot have any federal loans that you stopped paying or defaulted on in any way.
- Enough equity in your home – You’ll need to pay for a new appraisal on the home so that the lender can determine the home’s current value.
Getting Your Equity With the VA Cash-Out Mortgage
If you qualify for the VA loan, you’ll refinance your first mortgage. This means you’ll pay off your first mortgage and start a new one. You’ll lose the interest rate you have on your first mortgage and will take on a new one with the new mortgage.
At the closing, the new lender (or even the same lender) will pay off your first mortgage with the new loan that you get. The remaining proceeds go into your possession for you to do as you wish. You then have a new mortgage with a new mortgage payment.
The Difference Between the VA Cash-Out Loan and a Home Equity Loan
The VA backs the VA loan, which means lenders may be a bit more flexible with the guidelines. If you default on the loan, the lender can turn to the VA for repayment of the funds lost. This helps the lender take more risks because they know they won’t be at risk of losing most of the funds.
Aside, from the VA’s guarantee, though, what’s the difference between the two programs? Is one better than the other?
It depends on your situation.
The VA cash-out mortgage can be a great option if you:
- Don’t have great credit – Most VA lenders allow a credit score as low as 620 even for the cash-out loan. It may be hard to find a home equity lender that would allow the same thing. Typically, you need a higher credit score to get a second mortgage since the lender takes second lien position.
- Need a majority of your equity – The VA cash-out mortgage allows you to take up to 100% of your home’s equity if you qualify. Home equity loans typically max out at between 80% and 85% of your home’s value. If you need the full amount, you’ll want the VA loan.
- You want a low, fixed interest rate – VA loans offer low, fixed interest rates, making it possible to budget your payment each month. A home equity line of credit, on the other hand, has a variable interest rate and a home equity loan typically has higher interest rates than VA loans.
The home equity loan can be a great option if you:
- Don’t need as much of your equity – If you only need a portion of your home’s equity withdrawn, the home equity loan may suffice. Home equity loans close quicker than first mortgages, which means you’ll have faster access to your funds.
- You have a great interest rate on your VA loan – If you don’t want to touch your first mortgage (VA loan) because you have a great interest rate, the home equity loan can be a good option. You don’t mess with your first mortgage, but you still get access to your home’s equity.
- You only need a short term – If you can afford slightly higher payments to pay off the equity you borrow, the home equity loan is a good choice. You can pay it off in as little as 10 – 20 years. This limits the total amount of interest you’ll pay on the loan.
If you need to tap into your home’s equity, we recommend that you look at all of your options. What will give you the most equity at the price you can afford? Look at the bottom line of both options. How much total interest will you pay? How much equity can you obtain? What will your payments be and how long will you have the loan? These are the questions you need to ask yourself to figure out which option is right for you.