Most VA-backed loan customers use their benefit to buy a home or secure a new loan with a lower interest rate. But the use of other loan options, specifically cash-out refinancing, has more than doubled since 2012.
Nearly 137,000 VA-backed loans for cash-out or other refinancing products were issued in fiscal year 2016, the latest year for which figures are available. Only 56,525 such loans went out in fiscal 2012.
Compare those figures with the 215,561 interest rate reduction loans and 353,002 purchase loans with VA backing in 2016, and it’s clear that cash-out products have become a larger piece of the VA loan pie. If you’re in the market for one, here are some basic details from official VA sources, including their Lenders Handbook:
1. What you DON’T need: Unlike VA’s Interest Rate Reduction Refinance Loan, you aren’t required to have an interest rate lower than the existing rate. You also aren’t required to have lower monthly payments than an existing loan to secure VA backing.
2. What you DO need: An appraisal is required, as is full credit information and underwriting. You’ll need to have enough VA entitlement to cover the new loan, though that may not be an issue if you’re refinancing a VA-backed mortgage (see below).
3. Takes all kinds: The loan being refinanced doesn’t have to be a VA-backed loan. If you are refinancing a VA-backed loan, your entitlement “can be restored for the refinance,” per the handbook.
4. Some restrictions apply: The maximum loan amount can’t exceed the amount on the Notice of Value, with two exceptions: The funding fee can be rolled into the loan, and the costs of energy-efficient improvements can be added.
5. About that cash: There are no VA restrictions on what the money can be used for. Common uses include settling old debt (including student loans) or making home renovations. VA does have other home-renovation-loan options available, but those come with rules on what can be repaired or replaced.
6. Lending limits: Loans are capped at 30 years plus 32 days.
7. Know your options: Some of the above may sound good, but remember: VA is not the lender here. Borrowers must work out the terms of the agreement with private lenders, and that means credit scores and other factors can change the type of deals offered. If the deals aren’t to your liking, a home equity loan or other financial product might be a better fit.
Kevin Lilley is the features editor of Military Times.