If you have a VA loan now and you are ready to refinance to tap into your home’s equity, you probably wonder how much you can borrow.
The VA loan is one of the unique programs in this respect because it allows you to take out up to 100% of the home’s value. This is a great opportunity compared to conventional loans and FHA loans as they allow between 80% and 85% LTVs for cash-out refinances.
So how do you qualify?
The VA Cash-Out Reference Guidelines
The VA is just as flexible with their cash-out refinance guidelines as they are with their purchase mortgage guidelines.
The VA doesn’t set a specific credit score that you must have in order to qualify for their loans. A specific VA lender might have a score they prefer though. On average, lenders want to see veterans with at least a 620 credit score. Given the fact that conventional loans require a 680 credit score, the VA allows a fairly forgiving credit score.
The VA also doesn’t require that you meet a specific income threshold. In fact, they don’t even set maximum debt ratio requirements. Instead, they require you to have a specific amount of cash left at the end of each month after paying your bills. This is called your disposable income and is what you can use to pay the daily cost of living without sacrificing. The VA likes to know that you have enough disposable income each month to feel comfortable.
The VA also requires that you have a timely mortgage payment history. This just makes sense. If the lender is going to give you a larger loan than you had before, they need to know that you could make those mortgage payments on time. If you had trouble making the lower mortgage payments, who’s to say that you would be able to make a larger payment?
The Lender Overlays
The above guidelines are those set by the VA. The VA doesn’t underwrite or fund your loans, though. The individual lender does these jobs. This means the lender can set their own parameters on top of what the VA requires.
For example, the VA doesn’t have a set housing ratio requirement, but a lender may say that they don’t want your housing to take up more than 30% of your gross monthly income. Another example is the credit score. The VA doesn’t have a specific score you must have, but a lender may require that you have at least a 680.
If you come across a lender whose requirements you can’t meet, just shop around for another lender. This way you can find the lender that is willing to give you the loan you need.
Should You Take Out 100% of Your Home’s Equity?
The real question you may want to ask yourself is ‘how much should you take out of your home’s equity?’ Taking out 100% means you have no equity in your home. What happens if your home loses value and you need to move in the near future? You could find yourself upside down on your loan. This means you owe more than the home is worth. You could end up paying the lender out of your own pocket in order to pay the loan in full.
It’s best to leave a little equity in your home untouched. This way you know you have something to fall back on should you need to sell your home fast. It also protects you should your home lose value. Hopefully we don’t see another housing crisis like we saw before, but we all know that you can’t predict what will happen. It’s best to be prepared rather than being sorry.
The VA cash-out refinance is a great tool to help you get the most out of your VA benefits. If you need to tap into your home’s equity, try keeping as much equity as you can in the home, only withdrawing the funds you absolutely need. This way when your home appreciates, you gain even more equity and can walk away with a profit when you do sell your home.