You need a reasonable amount of home equity to get a VA cash out refinance. You can build equity by paying down your mortgage principal or if your home value rises. You can estimate your home’s equity by taking the current value of your home and subtracting your mortgage principal. For example, if your home is worth $250,000 and you owe $175,000 on your mortgage, you have $75,000 in home equity.
Your loan-to-value ratio affects how much money you may be able to borrow with a VA cash out refinance. Loan-to-value ratio is the percentage you get when you divide your mortgage amount by your home’s value. For example, if your home is worth $250,000 and you owe $175,000 on your mortgage, then your LTV is 70%. (That is, $175,000 ÷ $250,000 = 0.7 or 70%.) One advantage of VA cash out refinancing is you may qualify for a maximum LTV of 90%, which means you can borrow almost the full value of the equity in your home.
You typically need a reasonably good credit score, income, and finances to get your application for a cash out refinance approved. At Freedom Mortgage, we can often accept a credit score as low as 550 for VA cash out refinances.
Most VA homeowners need to pay a funding fee when they get a cash out refinance. This funding fee is 2.3% of the loan amount for their first cash out refinance and 3.6% for each cash out refinance after the first. Disabled veterans and surviving spouses may be exempt from paying this fee.
You will probably have to pay closing costs with a VA cash out refinance. These might average between 3% to 5% of the loan amount according to Veterans United. These closing costs are in addition to the funding fee.