VA Cash-Out Refinance: Use Your Benefit to Access Equity

What it is

This VA-backed refinance can pay off a VA, FHA or conventional mortgage. A paid-off home can also be considered. You need VA eligibility and must intend to occupy the home. It uses full credit, income and appraisal review, even when your goal is simply moving an existing loan into VA without receiving cash.

Two types, in plain English

Type I means the new loan amount is no greater than the payoff of the loan being refinanced. It can be useful when moving from FHA or conventional into VA. Type II means the new loan exceeds that payoff. The transaction classification affects the benefit and cost tests; cash in your pocket is not the only detail we check.

How much you can borrow

VA rules allow a total loan up to the full VA-appraised value, including any financed funding fee. A fee that would push the total above that value must be paid in cash. Lenders may set lower caps; we’ll tell you ours up front. Subtract the payoff and costs before estimating what you would actually receive.

Funding fee

The cash-out funding fee is 2.15% for first use and 3.3% after first use, unless exempt. Exemptions can include qualifying VA disability compensation, certain surviving spouses receiving DIC and active-duty Purple Heart recipients. We verify status rather than assume a fee applies.

VA funding fee schedule (as of 2023-04-07).

The benefit test

VA requires the new loan to be in your financial interest. A qualifying benefit may include removing mortgage insurance, shortening the term, lowering the rate or payment, increasing residual income, refinancing construction debt, staying at or below 90% of value, or changing an ARM to fixed.

You receive the required old-versus-new comparison within three business days of application and again at closing, including an estimate of equity removed. Access to cash is a decision about your home’s equity, not just a new payment.

Timing on VA-to-VA

When replacing a VA loan, seasoning includes six payments made and 210 days measured from the first payment due date. VA-to-VA Type I also has recoupment and rate-reduction tests, including recouping applicable costs within 36 months and the half-percentage-point fixed-to-fixed reduction. We confirm the specific transaction and dates before ordering the next step.

Credit and income

Expect full credit and income underwriting, an appraisal and a VA residual-income review. Residual income is what remains after major obligations and estimated living costs. A score alone does not answer the question. If credit or self-employment makes the file less straightforward, we review the whole picture before choosing a path.

VA cash-out vs IRRRL vs a second mortgage

An IRRRL is for an existing VA loan and is generally the first comparison for a rate-focused refinance. Cash-out can access equity or move another loan into VA. A HELOC or fixed second leaves the first mortgage in place. A favorable current first mortgage can make keeping it the less expensive choice.

How we run it

We check the Certificate of Eligibility, payoff, rough value, funding-fee status and occupancy. Then we run the benefit test and compare costs with the alternatives. You see what changes in the payment, balance and equity before deciding. If an IRRRL or keeping the first loan is the better fit, we say so.