VA Cash-Out Refinance
A VA cash-out refinance lets eligible veterans replace existing liens on their home with a new VA-guaranteed loan that can also provide cash, subject to specific VA rules on rates, value, and benefits.
What Is a VA Cash-Out Refinance
A VA cash-out refinancing loan pays off any existing mortgage or recorded lien on the property and can deliver additional cash to the borrower. Properties without an existing lien are not eligible. This option also covers interim construction loans, land balances for new builds, land sale contracts, and manufactured home lot purchases.
VA divides these loans into Type I and Type II based on the payoff amount of the loan being refinanced. Type I applies when the new loan pays off a VA-guaranteed loan. Type II covers payoffs of non-VA liens. Public Law 115-174 created these categories with different standards for each.
Topic 3. Cash-Out Refinancing Loans
Key Requirements from VA Guidelines
Veterans must meet the occupancy requirement and certify intent to occupy the home. The loan amount cannot exceed the reasonable value shown on the Notice of Value plus allowable items such as energy efficiency improvements and the VA funding fee. The Veteran must meet the occupancy requirement outlined in Chapter 3. Closing costs, including the VA funding fee, may be paid from loan proceeds but the loan amount may not exceed the maximum loan amount outlined in section g.
Topic 3. Cash-Out Refinancing Loans
Type I Versus Type II Cash-Out Loans
Type I loans carry stricter interest rate reduction rules. Type II loans allow more flexibility on rates. VA has promulgated regulations for cash-out refinancing loans at 38 C.F.R. § 36.4306. A cash-out refinance may also be made to refinance an interim construction loan regardless of whether there is a change in the original loan amount, the balance of the purchase of land on which new construction is to be financed through the proceeds of the refinancing loan, the balance of an existing land sale contract relating to the Veteran’s home or farm residence, a loan for the purchase of and secured by a manufactured home in order to purchase the lot on which the manufactured home is or will be permanently affixed, or a refinance of any other recorded lien against the property such as a mechanics lien or second mortgage.
Topic 3. Cash-Out Refinancing Loans
Interest Rate Rules for Type I Loans
Fixed-to-fixed: The new rate must be at least 0.50 percent lower than the existing VA loan rate. Example: If the interest rate of the existing VA-guaranteed loan being refinanced is 3.75 percent (fixed), then the interest rate of the Type I cash-out refinance may not be greater than 3.25 percent (fixed). If the interest rate of the existing loan was modified from 3.5 percent (fixed) to 7.0 percent (fixed), then the interest rate of the Type I cash-out refinance may not be greater than 6.5 percent (fixed).
Fixed-to-ARM: The initial new rate must be at least 2 percent lower. Example: If the interest rate of the VA-guaranteed loan being refinanced is 3.75 percent (fixed), then the initial interest rate of the Type I cash-out refinance may not be greater than 1.75 percent (adjustable). The lower rate cannot come solely from discount points. When more than one discount point is financed on a fixed-to-ARM loan, the LTV cannot exceed 90 percent of reasonable value.
ARM-to-fixed: No rate reduction is required. Therefore, the interest rate may increase on these transactions.
Topic 3. Cash-Out Refinancing Loans
Net Tangible Benefit and Fee Recoupment
Type I loans require a net tangible benefit. When the principal and interest payment rises, allowable fees and costs must be recouped within 36 months through the payment reduction. The calculation divides total allowable costs by the monthly payment savings. For Type I cash-out refinances that result in an increased principal and interest payment, the lender may not charge the Veteran loan fees, closing costs, or expenses other than taxes, amounts held in escrow, and the VA funding fee. Fee recoupment is the length of time it will take the Veteran to recoup certain costs necessitated by the refinance. The fee recoupment period of certain loan fees, expenses, and closing costs must not exceed 36 months. This requirement applies to Type I cash-out refinancing loans regardless of the interest rate and/or loan term of the new loan.
Fee Recoupment Calculation: The fee recoupment period is computed by dividing allowable loan fees, expenses, and closing costs, whether included in the loan amount or paid outside of closing, by the reduction of the monthly principal and interest (PI) payment. The fee recoupment period is not rounded.
Example: Allowable loan fees/expenses/closing cost of $3,250 divided by the Monthly PI payment reduction of $200 equals a fee recoupment period of 16.25 months. Example: Allowable loan fees/expenses/closing cost of $3,250 divided by the Monthly PI payment reduction of $90 equals a fee recoupment period of 36.1 months.
The VA Funding Fee, escrow, and prepaid expenses such as insurance, taxes (including Mello-Roos), special assessments, and homeowner’s association dues are excluded from the fee recoupment calculation.
Topic 3. Cash-Out Refinancing Loans
Comparison to IRRRLs
An IRRRL focuses on lowering the rate and payment on an existing VA loan. A cash-out refinance can pay any lien and provide cash but follows different rules on rates, payments, and guaranty. Purpose for IRRRL is to refinance an existing VA loan at a lower interest rate; for cash-out it is to pay off lien(s) of any type and can also provide cash to borrower. Interest rate for IRRRL must be lower than on existing VA loan (unless existing loan is an ARM); for cash-out any negotiated rate. Monthly payment for IRRRL must be lower than that on an existing VA loan (unless the ARM is being refinanced, a term is shortened, or energy efficiency improvements are being included); for cash-out no requirement. Discount points for IRRRL allow reasonable points to be paid with only two included in the loan amount; for cash-out reasonable points can be paid if paid from loan proceeds. Maximum loan for IRRRL is existing VA loan balance plus allowable fees and charges plus up to two discount points plus the cost of any energy efficiency improvements plus the VA funding fee; for cash-out 100 percent of the reasonable value of the property indicated on the NOV plus the cost of any energy efficiency improvements plus the VA funding fee. Maximum guaranty for IRRRL is at least 25 percent in all cases; for cash-out the maximum guaranty is the same as for purchases. Entitlement for IRRRL allows the Veteran to re-use the entitlement used on the existing VA loan without impacting the amount of entitlement in use; for cash-out the Veteran must have sufficient available entitlement.
Topic 4. Quick Reference Table for IRRRLs Versus Cash-Out Refinancing Loans
Disclosures Required
Lenders must provide an initial and final loan comparison disclosure plus a home equity disclosure. The home equity disclosure shows how much equity is removed and its potential impact on future sale or refinance. The initial comparison disclosure must be provided on or before the date of application. The Veteran must certify no later than the date of closing that they received the initial comparison disclosure. The final comparison disclosure must be provided at loan closing and the Veteran must certify receipt at closing. The home equity disclosure must be provided within 3 business days from the initial application date and at loan closing. It discloses the amount of home equity being removed and explains how removal may affect future sale or refinance. VA defines home equity as the difference between the reasonable value of the home and the amount needed to pay off all liens of record secured by the property.
Example: Reasonable value of the home is $250,000. The refinancing loan of $250,000 pays off first mortgage $200,000, second mortgage $25,000, and property tax lien $8,000. Present home equity is $17,000; proposed home equity is $0. Home equity removed is $17,000.
Topic 3. Cash-Out Refinancing Loans
Funding Fee and Loan Limits
The VA funding fee applies and can be financed when the total loan amount stays within the reasonable value limit. VA sets no dollar maximum loan amount; limits come from reasonable value and secondary market standards. There are no maximum dollar amounts prescribed for VA-guaranteed loans. Limitations on VA loan size are primarily attributable to secondary market requirements and the reasonable value of the property indicated on the Notice of Value. For cash-out refinances the loan amount including the funding fee may not exceed 100 percent of the reasonable value as determined by VA.
Step-by-Step Process for a VA Cash-Out Refinance
- Verify eligibility and available entitlement on the Certificate of Eligibility. 2. Confirm the property has an existing lien of record. 3. Order a VA appraisal after any construction is complete if applicable. 4. Review current loan terms against new rate reduction rules for Type I. 5. Calculate fee recoupment if payment will increase. 6. Receive and review initial comparison disclosure and home equity disclosure. 7. Underwrite the loan using VA’s underwriting guidelines. 8. Close the loan after all NOV requirements are met. 9. Pay the VA funding fee within 15 days of loan closing. 10. Receive the Loan Guaranty Certificate.
Required Documents Checklist
- Certificate of Eligibility to confirm eligibility and available entitlement.
- Current mortgage statements and lien details to verify existing liens of record.
- Recent pay stubs, W-2s, and tax returns for income verification.
- Bank statements for asset and reserve review.
- Credit report for credit history review.
- Property tax and insurance information.
- Any documentation related to energy efficiency improvements if applicable.
- Signed occupancy certification.
Worked Example of Fee Recoupment and Home Equity Impact
Consider a Type I cash-out refinance where allowable costs total $3,250 and the monthly principal and interest payment decreases by $200. The fee recoupment period is $3,250 divided by $200, resulting in 16.25 months, which meets the 36-month requirement. In a home equity example, a property with reasonable value of $250,000 and liens totaling $233,000 has $17,000 in present equity. After the refinance pays off all liens with a new loan of $250,000, proposed equity is $0, removing $17,000 of equity that could otherwise support a future sale or additional borrowing.
Common Mistakes to Avoid
Failing to confirm the property has an existing lien of record before applying. Overlooking the stricter rate reduction rules for Type I loans when the existing loan is VA-guaranteed. Not calculating fee recoupment accurately when the payment increases. Ignoring the requirement that the new loan amount stay within reasonable value including financed funding fee. Neglecting to review both initial and final comparison disclosures and the home equity disclosure before closing.
How Entitlement Works
Sufficient entitlement must be available. Cash-out refinances on the same property may allow restoration of previously used entitlement once the prior loan is paid off. Entitlement previously used may be restored if the property has been sold and the loan paid in full, or if an eligible Veteran-transferee assumes the loan. Special restoration applies for a regular cash-out refinance where the prior VA loan has been paid in full on the same property.
Topic 6. Restoration of Previously Used Entitlement
Frequently asked questions
What is the difference between Type I and Type II VA cash-out refinance?
Type I applies when refinancing a VA-guaranteed loan and carries stricter interest rate reduction requirements. Type II covers non-VA liens and allows more flexibility on rates. The classification depends on the payoff amount of the loan being refinanced under VA rules.
Does a VA cash-out refinance require a lower interest rate?
Type I loans require the new rate to be at least 0.5 percent lower for fixed-to-fixed or 2 percent lower for fixed-to-ARM. ARM-to-fixed has no reduction requirement. Type II loans have no mandated rate reduction. The reduction cannot come only from discount points.
Can closing costs be financed in a VA cash-out refinance?
Closing costs and the funding fee may be paid from loan proceeds when the total stays within the reasonable value of the property. Type I loans that increase the payment limit fees that can be charged beyond taxes, escrow, and the funding fee.
What disclosures are required for a VA cash-out refinance?
Lenders must provide initial and final loan comparison disclosures plus a home equity disclosure. The home equity disclosure explains the amount of equity removed and how that may affect future sale or refinance decisions.
How does fee recoupment work on Type I cash-out loans?
When the payment increases, allowable fees and costs must be recouped within 36 months through the monthly principal and interest savings. Divide total allowable costs by the payment reduction to find the exact period in months.