Refinancing a VA loan is much like refinancing any other mortgage. However, VA loans do have a refinance option that conventional loans do not have. This option is referred to as a VA “streamline” and is a VA-to-VA refinance that requires very little documentation. No income or employment check, no appraisal required and no need for verification of assets. As long as the borrower is refinancing an existing VA mortgage into a new one and is either lowering the interest rate or switching from a variable rate loan to a fixed, the streamline program is available. And, just like a conventional refinance, borrowers with an existing VA loan can pull out some cash during the refinance process given sufficient equity.
VA guidelines allow borrowers to pull out equity in the form of cash during the course of a refinance like any other loan but now the loan is not eligible for the streamline option. VA streamline loans do not allow for any cash out during the transaction but a VA cash-out does. VA allows for up to 100 percent of the current appraised value to be refinanced including cash out. However, most lenders will limit a VA cash out loan up to 90 percent of the appraised value. You might also have just noticed that a new appraisal is required for a cash-out loan whereas a streamline does not. For example, a property is appraised at $300,000 and the current loan balance is $200,000. 90% of the appraised value is $270,000 and after subtracting closing costs and the VA funding fee, the remainder can be pulled out as cash in the bank.
In addition to an appraisal, a VA cash out loan requires the lender to verify income, credit and employment. A VA cash-out loan is almost identical to a VA loan approval for a purchase transaction only there is no sales contract. Everything is documented and even some of the requirements upgraded a bit due to the additional risk associated with a cash-out loan, similar to how conventional cash out loans are treated.
The borrowers will be asked to provide their most recent pay check stubs covering a 30 day period along with two most recent W2 forms. The lender may also contact the employer to verify current employment as well as an employment history. For self-employed borrowers they can expect to provide copies of their most recent federal income tax returns along with a newly created profit and loss statement. The lender will also pull a credit report for a VA cash out loan which is not required for a streamline refinance. Credit scores will also be ordered and some lenders require a minimum credit core to be higher compared to the one used for a purchase. For a purchase loan the minimum score might be 620 while for a cash-out loan the score requirement might be 680.
A VA cash out loan should be discussed with your loan officer as there are costs involved along with additional documentation. But if you’re thinking of refinancing to get a better rate and you have some additional equity in your property, it’s something to consider.
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