Inside the VA Cash Out Refinance
An existing VA mortgage, just like any other mortgage, can be refinanced. A refinance is simply the process where one mortgage replaces another; it’s a “re-finance.” The VA home loan however is eligible for both “streamline” refinance and a standard refinance. A VA streamline refinance, sometimes referred to by the acronym IRRRL, or Interest Rate Reduction Refinance Loan, is a VA program requiring minimal documentation from the borrower as well as no need for an appraisal.
A VA streamline loan requires no income documentation, no employment verification and no credit score needed. It’s truly a streamlined process. Yet if the borrower wants to pull out additional cash from the refinance, called a Cash Out refinance, the streamline option goes away. What are the requirements for the VA cash out loan?
The VA doesn’t have a maximum loan amount yet does have a maximum amount they will guaranty. This guarantee is 25 percent of the VA home loan. If a VA lender makes a $200,000 loan, the VA will guarantee 25 of the amount to the lender should the loan go into default. Lenders have established the maximum VA loan they will approve is equal to the conventional loan limits of $417,000 set by Fannie Mae and Freddie Mac. Other areas can have higher limits should the property be located in an area considered “high cost.”
With regard to a cash out refinance, the maximum loan amount can represent no more than 100 percent of the property’s value. This value is determined by reviewing a new appraisal on the property, unlike the appraisal-waiver feature of a VA streamline. However, even though the VA allows for a cash out refinance, that does not imply that VA lenders will do so. Most VA lenders cap the maximum loan amount to 90 percent of the value of the home, regardless of any VA limit.
For example, the borrower applies for a VA home loan and the appraised value is $300,000. The maximum loan amount is 100 percent of $300,000, or $300,000. If the existing VA mortgage balance is $200,000 and closing costs are $5,000, the cash to the borrower is $300,000 - $205,000 = $95,000.
While the VA streamline refinance does not require income or employment documentation whatsoever, the VA cash out loan requires the borrower provide evidence of both. This verification is initially accomplished when the VA borrower provides copies of pay check stubs covering the most recent 30 day period. All monthly income from all who appear on the loan application must be verified.
The borrower will also be asked to provide W2 forms from the previous two years and many VA lenders also ask for copies of the most recent two years’ federal income tax returns. The lender is required to determine that the borrower’s income is sufficient to cover the new, VA cash out mortgage payments in addition to other monthly obligations such as an automobile, credit card or student loan payment.
Again, unlike the VA streamline refinance, the borrower’s credit report will be pulled and reviewed by the VA lender evaluating the VA cash out refinance request. While the VA does not establish a minimum credit score, most lenders require a minimum credit score of 620 although lenders have the right to increase this minimum score requirement to 680 or above, depending upon the lender’s preference.
All VA cash out loans require a full appraisal as the maximum loan amount is based upon the current appraised value. The VA lender will order the appraisal and use the reported value to establish a loan amount. It should be noted that just because a VA cash out loan can be as much as 100 percent of the value of the property does not mean the veteran is required to accept the maximum loan amount.
A Good Option?
When considering a VA cash out refinance loan, care should be taken to make sure the VA cash out program is a true benefit. Remember that VA home loans require a funding fee and can be as much as 3.15 percent of the loan amount, reducing the net amount of cash to the borrower.
If you have enough equity in your home, a cash out loan underwritten to conventional standards can provide more cash to you without the need for a funding fee. Talk with your VA loan officer to decide which option is better for you.
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