Veterans Affairs (VA) Cash-Out Refinance Requirements

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Eligible borrowers considering a Veterans Affairs (VA) cash-out refinance must get familiar with the requirements. A VA cash-out refinance has the potential to help eligible veterans, active-duty military, and surviving spouses tap into their home equity for cash or even refinance a non-VA loan into a VA loan.  

If that sounds like something that aligns with your goals, now is a great time to get an idea of what you’ll need to meet the VA cash-out refinance requirements. In this article, we will explain how eligibility works, what lenders usually look for, and how you might go about strengthening your application.

Eligibility & Certificate of Eligibility (COE) Basics

The Certificate of Eligibility (COE) is a document from the VA that proves you are allowed to use your VA loan. Veterans can apply for their COE themselves before they find a lender, if they would like to do that. However, your lender should never require you to obtain the COE on your own.   

Further, it might be helpful for you to work with your lender to get your COE. They are likely more familiar with the process and more equipped to guarantee the integrity of the document. To get your COE, you will need to submit documents such as:  

• DD 214 for Active-Duty Service Members and Reservists that indicates Character of Service  

• NGB 22 for National Guard members that indicates Character of Service  

• Driver’s license or other government-issued identification  

• Income information, such as a W-2 or pay stubs  

To understand the specific service requirements set by the VA, click here.

Credit, Income & Debt Overview

The VA does not have a minimum credit score requirement, though they do require that borrowers have enough income to afford the mortgage and other obligations. Although the VA does not have a specific credit score requirement, most lenders will. They will also review your credit history, current debts, employment history, income, and other relevant information to better understand your financial situation. As you consider different lenders, be sure to ask them about their specific requirements.

Appraisal & Equity/Loan-to-Value (LTV)

An appraisal is required for VA cash-out refinances. This is similar to the process for the standard VA loan, meaning the independent appraiser will assess your home to determine its value and whether it meets VA minimum property requirements (MPRs). A high or low appraisal will play a part in determining the amount of equity you will have access to for cash, as the value of your home impacts your equity.  

Additionally, the VA will not guarantee a cash-out refinance with an LTV over 100%. This includes the funding fee if that has been financed into the loan. So, the reasonable value of the property, as determined during the appraisal process, will impact whether or not your VA cash-out refinance can move forward at a certain price point.  

LTV is calculated by dividing the total loan amount by the appraised value of the property. That means if you’re seeking a loan worth $300,000, but your home is appraised at $275,000, you would have an LTV of 109%. The VA would not be able to guarantee that.

Seasoning & Payment History

The VA also has requirements regarding seasoning and your loan payment history, and these apply whether the original loan is a VA loan or not. For reference, seasoning in a lending context describes the amount of time that you have held your loan.  

If you are considering applying for a VA cash-out refinance, those requirements include:  

1. 210 Days. The first monthly payment on your original loan must be at least 210 days before closing on your refinance.  
2. 6 Months. You must have made six monthly payments on the loan you are refinancing.  
3. Under 1 Year. If your original loan closed less than a year before the date of closing, your lender will have to get a payment history from your loan servicer. This payment ledger should document all payments made on that loan. 

Occupancy Requirements

As with any VA loan, the borrower must show that the property being refinanced is their primary home. The VA loan is not intended to be used to buy vacation homes or investment properties, and the same applies here for a VA cash-out refinance.

Required Documents

Borrowers may be required to provide documents such as the following when they apply for their VA cash-out refinance:  

• DD214, Discharge & Separation Documents 

• Most recent 30 days of pay history 

• Most recent two years tax returns with all schedules 

• Most recent two years W2 statements from all employers 

• Most recent two monthly asset statements.  

• Copies of most recent monthly mortgage statements 

If applicable, borrowers may also need to provide any credit explanation letters, bankruptcy paperwork, or divorce settlement paperwork.

Net Tangible Benefit

Finally, a VA cash-out refinance must meet the VA’s Net Tangible Benefit (NTB) requirements. That means that the loan must meet at least one of the following criteria: 

1. Mortgage Insurance. The refinance gets rid of monthly mortgage insurance. 
2. Loan Term Length. The loan term for the refinance is less than that of the original loan.  
3. Interest Rate. The refinance would have a lower interest rate than the original loan (If the original loan is an adjustable-rate mortgage, this would take the current rate into consideration.). 
4. Monthly Payment. The total monthly payment (principal plus interest) would decrease for the borrower after refinancing.  
5. Fixed Rate. The new loan switches the loan type from adjustable rate to fixed rate.  
6. Construction Costs. The cash-out refinance is used to pay off the borrower’s interim construction loan. 
7. LTV. The new loan has an LTV less than or equal to 90%. 
8. Income. The new loan results in an increase in the borrower’s monthly residual income. 

How to Strengthen Your File

Of course, it would likely be wise to work on reducing your debts, making consistent payments on any debts, and increasing your income before applying for a VA cash-out refinance. However, there are other things that could help your file. These are called compensating factors.  

Compensating factors can’t be used by your lender to overcome ineligible credit scores, but they can be taken into consideration for residual income or debt-to-income ratio shortfalls. They should showcase a specific strength in your financial profile. The VA would consider the following as examples of compensating factors: 

• Excellent credit history 

• Minimal consumer debt 

• Long-term employment 

• Significant liquid assets 

• The existence of equity in refinancing loans 

• High residual income 

• Low debt-to-income 

There are other compensating factors that could strengthen your profile with your lender, which is why it’s important that your lender has a very clear picture of your financial situation.

Final Thoughts

If you are applying for a VA cash-out refinance, we hope this article gave you some helpful insight into the requirements for that loan. Every lender is likely to have some differences in certain requirements, so be sure to have clear conversations with lenders about their distinct policies.