If you need a cash-out refinance, be ready to show a lender that you are a good risk. When a lender gives you more money than you already have outstanding, it puts them at risk. Luckily, the VA guidelines are not nearly as strict as many other cash-out refinance programs.
The Credit Score
Just like when you bought your home with VA financing (if you did), the VA didn’t require a minimum credit score. Your VA lender, however, will likely require a minimum credit score. Many lenders stick with the purchase VA loan credit score requirement of 620, but some require a higher score. You can always shop around with different lenders to find the lender that will accept your credit score.
The Debt Ratio
Typically, lenders allow a debt ratio of up to 41%. This includes all debts that you currently have plus your new mortgage payment. This is typical of what the VA required for a purchase loan too, so it’s nothing much stricter than what you are used to seeing.
The debts that get included in your debt ratio include any installment loans, car loans, student loans, personal loans, and minimum credit card payments. Your lender will also include your new mortgage payment plus the real estate taxes and homeowner’s insurance if they aren’t already included in your mortgage payment.
In order to be able to borrow equity from your home, you’ll need to prove that you have equity. You do this with a new appraisal on the home. The new appraisal should show a higher value for the home than when you bought it. Although if you’ve had the mortgage for a long time, you may have paid the current mortgage down enough to already have equity in the home.
The lender will use the value on the new appraisal to determine your equity. You can then borrow up to 100% of that equity. For example, let’s say your home is worth $300,000 according to the new appraisal and you have an outstanding principal balance of $150,000 on your mortgage. You have another $150,000 that you can borrow if you choose to take a 100% LTV loan.
Proof of Income
You must be able to prove to the lender that you can afford the new payments since they will likely increase. You can do this with your paystubs and W-2s. You’ll need to provide the lender with paystubs that cover the last 30 days as well as W-2s for the last two years.
Lenders need to make sure that your income is consistent and reliable. If your income changes constantly or you change jobs often, you won’t show the consistency the lender needs. Remember, the lender wants to keep the risk of default low, so any positive factors you can show will help your case.
If you will bring money to the closing to cover the closing costs, you’ll need to prove the funds’ origination. You can do this with your last two months of bank statements. If you are going to sell an asset or get the funds any other way, make sure you provide ample paperwork showing where you got the funds as well as the deposit of the funds in your checking account.
Any large deposits or questionable transactions may be questioned by the lender, so make sure that you have your answers ready for them. Any large deposits can signify the presence of a new debt that just isn’t reporting on your credit report yet – lenders need to make sure that this is not the case.
List of Debts
If you have debts you will roll into your mortgage, you may need to provide the lender with a list of the debts and the amounts you’ll include in the mortgage. This is necessary if your debt ratio exceeds the 41% limit. If by paying off the debts, your DTI falls into the required range, you will need to prove this to the lender so that they can approve your loan.
Qualifying for a VA cash-out loan isn’t much different than qualifying for the VA purchase loan. You don’t have to use your current lender either. You are free to shop around with any lender that you think will suit your needs. It’s a good idea to get quotes from at least three lenders so that you know you’ll get the best deal possible.