Aside from its Interest Rate Reduction Refinance Loan (IRRRL) Program, the U.S. Department of Veterans Affairs also offers a cash-out refinance program. VA Cash-Out Refinance helps homeowners with/out VA loans to refinance: lowering their rate and taking out cash by tapping into their equity.
What’s a VA Cash-Out Refi?
The VA Cash-Out Refinance program has two major features:
- Works like a typical cash-out refinance program: you apply for a new loan larger than your current loan and get the difference in cash after loan closing; and
- Serves as a vehicle to refinance into VA loans: Even if you don’t have equity and hold a non-VA loan, e.g. Federal Housing Administration (FHA) loan or conventional loan, you can refinance into a VA-backed loan and be able to pay off this loan.
Under this cash-out refinance program, a borrower may be allowed to refinance up to 100% of the value of the property. To do that, there must be an existing lien on the mortgage of any type; otherwise, mortgages that have been paid off or are free and clear of all liens are not eligible for a VA cash-out refinance.
Guidelines on VA Cash-Out Refinance may vary among lenders. But, the program follows the usual underwriting practices for mortgages, like credit score verification and appraisal requirement. A standard credit score requirement is 620.
Like a VA Purchase Loan?
A look at the official VA site would tell you that VA Purchase and Cash-Out Refinance loans are grouped together as they share similar attributes.
Among those is the VA funding fee structure, which requires veterans to pay a basic VA funding fee of 2.15% for first-time use of their VA loan benefit and 3.30% for subsequent use. Funding fees depend on the amount of down payment and type of borrower (i.e. veteran or reservist/National Guard).
VA Cash-Out Refinance or IRRRL?
While both are backed by the VA, VA Cash Out Refinance and VA Streamline Refinance (IRRRL) are distinct programs with the following features.
Purpose. An IRRRL refinance is done to get a lower interest rate. A VA cash-out refinance is accomplished to pay off mortgage and provide cash to the borrower.
Type of loan. IRRRL is a VA-to-VA loan refinance. While a VA Cash-Out Refinance is for any type of loan to a VA loan refinance.
Cash-out. IRRRL does not allow for cash-out refinances; VA Cash Out Refinance gives that option to borrowers.
Guaranty. VA can provide at least 25% in all loans under the IRRRL program. For VA Cash-Out Refinance, the guaranty may be up to 100% LTV.
Interest Rate. IRRRL requires that the new rate be lower than the current rate. The rate on a VA cash-out refi loan may be negotiated.
LTV. IRRRL does not require an appraisal so maximum LTV is not set. Cash-out refinance may allow up to 100% LTV as determined by an appraisal.
Maximum Loan. IRRRL loan amount is equal to current loan + closing costs + energy improvements + VA funding fee. VA Cash-Out Refinance loan amount equals 100% of the value of the property + energy improvements + VA funding fee.
Mortgage Delinquency. One 30-day late payment is allowed during the last 12 months under IRRRL while VA Cash-out Refinancing does not allow any delinquency within that period.
Owner-occupancy. IRRRL does not require the property to be owner-occupied, but VA Cash-Out Refinance does.
A VA cash-out refinance might be a worthwhile option if you’ve been unable to refinance through IRRRL or don’t have a VA loan. »Learn more about VA refinance programs here.»