One of the frequently asked questions among interested VA loan applicants is whether they can borrow a second VA loan while still servicing another loan.
The short answer is yes, and there are several options to explore. One such possibility is acquiring a VA cash-out refinance loan.
Here’s everything you need to know about VA cash-out refinancing, with a focus on its benefits.
Understanding VA Cash-Out Refinance Loans
The best way to define VA cash-out refinance loans is to step back and familiarize yourself with VA loans.
VA loans are guaranteed by the United States Department of Veterans Affairs. They are available to active duty servicemembers, veterans, and their surviving spouses who wish to become homeowners.
Contrary to popular misconception, the U.S. government doesn’t advance VA loans. The state only guarantees a significant portion of the loans.
However, the fact that VA loans are state-backed makes them remarkably accessible. These credit options require no down payment and attract more competitive interest rates than traditional loans.
Now, a VA cash out refinance loan is a type of VA loan that allows you to replace your existing VA loan with a new one under different terms.
VA cash-out refinance loans are excellent for homeowners who trade equity for cash. You can utilize the cash benefits to address various emergency or ongoing financial needs.
Example of A VA Cash-Out Refinance Loan
Assume that you’re currently servicing a VA loan worth $300,000 and have paid $50,000 of the borrowed amount. But for some reason, your property is still valued at $300,000.
Seeking out VA cash-out refinance allows you to secure a $300,000 loan and utilize the $50,000 (less fees and closing costs) to fund other personal needs.
Benefits of VA Cash-Out Refinance Loans
1. Access to Quick Cash
This is unarguably the biggest motivation behind seeking out VA cash-out refinancing.
As mentioned, VA cash-out refinance loans provide cash in exchange for equity. It’s one of the few ways to earn direct financial benefits from a lender.
You can utilize the cash received from VA cash-out loans to settle various financial needs in your home or business.
However, qualifying for a VA cash-out refinance loan depends on your current property’s valuation. Ideally, your home must be valued at a cost similar to or greater than its valuation when you procured the first VA mortgage.
2. Freedom of Spending
Many mortgage lenders prescribe stringent measures on how you can utilize a borrowed loan.
Generally, you can only channel the funds into a preapproved real estate project. Failing to honor these spending guidelines may result in costly fines, including interest rate readjustments and shorter repayment periods.
Fortunately, it’s exciting to know that you can use a VA cash-out refinance loan in any way you like.
Experts recommend utilizing a VA cash-out refinance loan as cash at closing for debt repayment, settling liens, or purchasing business stock or equipment. But if there are no such needs, you could channel the funds to personal expenses like home improvements, school fees, and vacations.
3. Lower Eligibility Criteria
VA cash-out refinance loans are accessible to active duty and honorably discharged servicemembers and their respective surviving spouses. That requirement applies to VA loans in general.
Interested applicants must also obtain a certificate of eligibility (COE) and provide proof of income. Depending on your lender, you may have to meet the minimum credit score (generally 620) and debt-to-income (DTI) ratio.
However, one major distinction is that VA cash-out refinancing is available whether you have an existing VA mortgage loan or not. Applicants with existing VA loans have less paperwork to fill out.
The only noteworthy drawback is that VA cash-out refinances are reserved for your primary live-in residence. Currently, there are no provisions for refinancing a VA loan for a second home or commercial property.
4. Reasonable Fees
Fees drive access to credit facilities. Borrowers typically gravitate towards lenders that charge rock-bottom fees and low interest rates.
Fortunately, it’s exciting to know that VA cash-out refinancing loans are exempt from down payments. So, you don’t have to worry about financing a portion of your mortgage from out of pocket.
VA cash-out refinancing also attracts reasonable fees. The fees currently stand at 2.15% of the loan principal for first-time and 3.3% for previous beneficiaries.
Even better is that you can choose to pay the applicable funding fees upfront or roll them over into your monthly premiums.
5. Quick Processing
Swift application and processing is another commonly overlooked benefit of VA cash-out refinance loans.
As with most credit facilities, you’d typically start by finding a lender. Compare lending terms, such as interest rates and maximum borrowing amounts, to hone in on the right lender.
The next step is to get your certificate of eligibility. You can request the COE yourself online via mail or through your lender.
Now, provide your lender with your financial documents, including bank account statements, pay stubs, and tax returns.
Pass their credit requirement and get a licensed home valuer to appraise your property.
Finally, close the loan by signing the relevant paperwork.
Summary
While it’s possible to access VA cash-out refinance loans, it’s important to remember that these credit facilities are inherently available to members of the uniformed forces and their families. That means all the above-listed benefits only apply if you’re an active duty servicemember, veteran, or surviving spouse.
