If you are a veteran who served at least 90 days during wartime or 180 days during peacetime and have an honorable discharge, you likely qualify for a VA mortgage. This loan program provides you with many benefits including no down payment, no monthly mortgage insurance, and low interest rates. The loan program also has flexible loan guidelines. This is all true if you purchase a home. If you wish to refinance in order to tap into the equity of your home, though, there are some different parameters.
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The VA Mortgage and Home Equity Loans
There is not a second mortgage pertaining to your home equity from the VA. They provide first liens for eligible borrowers. If you want to tap into the equity of your home, you have to take out a second or home equity loan. Many lenders offer this loan program with
flexible guidelines. The second mortgage holder must agree to subordinate the loan, however. On your title, the first lienholder is the mortgage company who recorded the loan first. Since your VA loan will already be on the title, the second mortgage automatically takes second lien position.
If you decide to refinance your VA loan in the future, though, an issue could occur. Because the new VA loan would have a later date than your home equity loan, technically the second mortgage could take first lien position. The VA will not accept this – the second lienholder has to agree to subordinate again. Most lenders agree to this, as it is standard procedure. You must start the subordination right away with a VA loan, though, as it is a lengthy process.
The VA IRRRL Program
The VA offers veterans the opportunity to refinance their VA loan with little verification required. In reality, this means they do not need:
- A new appraisal
- Income verification
- Asset verification
- Credit score verification
The only requirements are that the loan payment decreases because of a lower interest rate and that you have on-time mortgage payments for the last year. You can have
one 30-day late payment in the last 12 months to qualify. However, you must be current at the time of application.
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Because you do not need to verify any factors contributing to the loan, you could be upside down on your mortgage balance, have different income, or lower credit. The lender only needs to verify that you benefit from the refinance with a lower payment. The VA considers this enough proof to refinance because if you could afford the higher payment, chances are you could afford the lower payment in the future.
One thing you cannot do with the VA IRRRL program is take cash out of the home. The loan amount cannot exceed the current outstanding principal, VA funding fee, and allowable closing costs. The Interest Rate Reduction Refinance Program does not allow any cash out, no matter how much equity you have in the home.
The VA Cash-Out Loan
If you wish to tap into the equity of your home with a VA Mortgage, you can do so with the VA Cash-Out Loan. This loan program requires full verification of all factors including income, assets, credit, and the value of your home. Oftentimes, the VA cash-out loan is the best choice because of the lower interest rate the loan provides as well as the high LTVs allowed. In many cases, you can take out up to 100 percent of the value of your home in a cash-out refinance. Of course, the lender will require top-notch parameters including great credit, a low debt ratio, and stable credit in order to qualify for this loan. The VA also does not allow any late mortgage payments during the last 12 months in order to qualify for this loan program.
One thing to keep in mind with the VA Cash-Out Refinance is the funding fee you must pay upfront. If this is your first time using the cash-out option on your home, you pay 2.15 percent of the loan amount in a
funding fee. If this is a subsequent use of the cash out option, the VA charges 3.3 percent for a funding fee. You need to figure this into the money you need to bring to the table or wrap into your loan amount, taking away from the cash you receive as a part of the loan.
Whether the home equity loan or a cash out VA mortgage is the right choice for you is a personal decision. You need to weigh all of the factors in your situation. The interest rate, fees, and terms should help you determine what works best for you, but you should also consider the costs. Figuring out how long it will take you to break even with the costs will help you make the right decision.
Generally, if you do not plan on living in the home for the long-term, paying the funding fee again might not make sense as it can take up a good portion of your available funds. For example, if you take out a $200,000 VA cash-out loan and this is your first time using this benefit, you will owe $4,300 in a funding fee. This is a significant amount of money that will take you a while to make up in equity in the home. If you will not live in the home long enough to make this money back, you might be better off with a home equity loan. Talking with a lender and going over all of your options can help you make the right choice for you.
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