I Have a VA Mortgage. Can I Get a Home Equity Loan?
If you have a VA loan and are wondering how to get equity out of your home, you’re in luck: you can use a home equity loan, home equity line of credit (HELOC) or VA cash-out refinance. All of these options will put cash in your pocket that you can use for anything you choose.
Be aware, though, that there’s no such thing as an official VA home equity loan. The U.S. Department of Veterans Affairs (VA) backs cash-out refinances, but not other home equity products.
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How does a home equity loan work?
A home equity loan is one of the most common ways to borrow against your home equity. You’ll receive a lump sum of cash upfront and pay back the loan over time, typically at a fixed interest rate. Your home secures the debt, so if you don’t make your monthly payments you could lose your property to foreclosure.
Equity is the difference between how much you owe on your home and how much it’s worth. You’re typically limited to borrowing 85% of your home’s value but the amount you’re able to borrow also depends on:
- Your income
- Your credit
- Your home’s market value
Tip. The easiest way to get a ballpark estimate of how much borrowing power your equity will earn you is to use a home equity loan calculator.Equity also factors into your loan-to-value (LTV) ratio. Lenders use your LTV ratio to assess your risk as a borrower and, because lenders believe that a higher LTV means more risk, you’re likely to get the lowest interest rate offers the lower you can push your LTV.
With home equity loans, lenders may combine the LTV ratios from both your first mortgage and the home equity loan into a single “combined” loan-to-value (CLTV) ratio. For example, if you owed $250,000 on a $450,000 house, your LTV would be around 56%. But if you then wanted to take out a home equity loan worth $15,000, your CLTV would be about 59%.
Interest rates and closing costs (typically between 2% and 5% of the loan amount) vary by lender, so you should shop around for the best rates available.
Things you should know
Home equity loans are sometimes called second mortgages because they are second-lien loans. This just means that if your home is ever foreclosed upon and sold to repay your debt, your original mortgage lender will be paid back first. Any money leftover would go to the second lien — in this case the home equity loan — but if there’s no money left, that lender would get nothing. This makes any second-lien loan risky for a lender and is likely why the VA doesn’t guarantee second loans.
How to qualify for a home equity loan
In addition to the factors mentioned above, lenders will also typically look at your income, expenses and debt when considering you for a home equity loan and setting your interest rate. Prepare to show your tax returns, proof of employment and bank statements.
You must have a credit score of at least 620, but many lenders require a 660 to 680 credit score or better to qualify for a home equity loan. The better your credit score, the lower your interest rate tends to be. This can have a major impact on your monthly payment.
The good news is that no matter what interest rate you end up with, you may be able to deduct the interest paid on a home equity loan from your federal taxes. Interest can be deducted when used to “buy, build or substantially improve” the home securing the loan.
Home equity loan pros and cons
| Pros | Cons |
|---|---|
Fixed interest rates make monthly payments predictable No restrictions on how you can spend the money Interest payments may be tax-deductible | Closing costs range from 2% to 5% of the amount borrowed Using your home as collateral can lead to foreclosure if payments are missed |
Home equity line of credit
A home equity line of credit (HELOC) is a revolving line of credit, similar to a credit card. Instead of receiving a lump sum of cash upfront, HELOC borrowers can make purchases and pay bills as needed, up to a credit limit.
You may have a specific window of time, called a draw period, in which to spend your money. This typically lasts 10 years or more. Then you enter the repayment period, often 10 or 15 years. You can borrow up to as much as 85% of your home equity, just like with a home equity loan.
HELOCs typically come with variable interest rates, but fixed-rate offerings may be available. The interest rate you pay will adjust with the market, but variable-rate HELOCs often come with an interest rate cap. As you shop for a HELOC, pay close attention to the rates and terms offered, including whether there’s a low introductory rate that will reset and affect the size of your monthly payments. Also watch out for upfront costs, which may include appraisal, document prep and title insurance fees.
Additional fees can be charged over the life of the loan. These often include:
→ Annual participation fees
→ Transaction charges
→ Inactivity fees
→ Cancellation fees
Remember: There is no official VA HELOC offered by the U.S. Department of Veterans Affairs. However, both military and civilian lenders offer HELOCs, often with special terms for veterans.How to qualify for a HELOC
HELOC lenders will take a look at your full credit profile when deciding whether to issue you a credit line and what interest rate to charge you. Some lenders require at least a 680 credit score to qualify for a HELOC, with credit scores between 620 and 680 being handled case by case. There are some bad-credit HELOCs available for applicants who hold considerable equity.
Your lender will also evaluate your outstanding debt, including current payments on your VA mortgage, car, credit cards and student loans, as well as any child support you may be paying. Your total monthly debt payments divided by your earnings makes up your debt-to-income (DTI) ratio. Although there are exceptions, many lenders may balk at DTI ratios above 43%.
As with home equity loans, the better your credit, the less you tend to pay in interest.
HELOC pros and cons
| Pros | Cons |
|---|---|
Long draw periods, up to 10 years or more Only pay interest on the amount you spend Lower upfront costs compared to home equity loans | Variable interest rates mean payments can increase significantly Many HELOCs require an initial draw and minimum total draw amount, reducing flexibility Recent inflation and rising interest rates make a variable-rate loan more risky |
VA cash-out refinance
As mentioned above, the VA doesn’t back second-lien loans, and therefore doesn’t offer or guarantee home equity loans or HELOCs. However, there is an official, VA-backed program that can help you access cash through the equity in your property: the VA cash-out refinance loan.
This loan allows you to take out a new VA mortgage for a larger amount than you currently owe and pocket the cash difference. If you qualify, you can also convert a non-VA mortgage into a VA loan. The VA will guarantee cash-out refinance loans up to 90% of your home’s value. The cash-out loan pays off the outstanding debt on your original mortgage, and the new loan amount is based on your home’s appraised value.
Many veterans must pay a one-time funding fee when taking out a VA loan. This fee can be 2.3% or 3.6% of the loan amount, depending on how many times you’ve used the VA loan benefit. This can be financed into your loan amount. However, other closing costs on your VA cash-out refinance can’t be financed into your loan.
How to qualify for a VA cash-out refinance
When you were first approved for a VA loan, you should have received a certificate of eligibility (COE) that verifies you qualify for VA home loan benefits. If you don’t have the original, you can apply for a new COE online. You must also live in the home that is being refinanced.
There is no minimum credit score required, but the VA requires lenders to evaluate income and monthly debts to determine if borrowers can make monthly payments.
The application process is similar to the one the VA uses on a purchase mortgage. The lender may want to see two years of federal income tax returns and W-2 forms to determine your ability to repay the new mortgage. As of 2020, loan limits no longer apply to veterans with their full VA entitlement benefits.
Tip. Although most VA loans must meet several unique requirements set forth in the Economic Growth, Regulatory Relief and Consumer Protection Act intended to protect veterans from predatory lenders — including a net tangible benefit test, fee recoupment time-limit and seasoning requirements — cash-out refinances are exempt from these standards.VA cash-out refinance pros and cons
| Pros | Cons |
|---|---|
Allows borrowers to access more equity than most other loan programs Typically include fixed interest rates, meaning monthly payments are stable over the loan term The VA imposes a cap on lender fees No mortgage insurance is required Some closing costs can be financed | Adding to debt extends the time it takes to own home outright May need to pay a VA funding fee up to 3.6% of loan amount Homeowners in Texas may not be able to use the program due to state law |
Interest rates compared: Home equity loan vs. HELOC vs. cash-out refinance
Once you understand how the different loan types work, your decision may hinge on the interest rates offered. Here’s a quick overview of how the interest rates for these three loan types stack up.
| Home equity loan | HELOC | Cash-out refinance | |
|---|---|---|---|
| Fixed or variable? | Fixed | Variable | Fixed |
| Rate competitiveness | Higher rates than HELOCs and cash-out refinances | Higher rates than cash-out refinances; lower rates than home equity loans | Lower rates than HELOCs and home equity loans |
Alternative option: A personal loan
You may need a smaller amount of money or don’t wish to use your home as collateral. If that’s the case, a common alternative for veterans needing an infusion of cash could be an unsecured personal loan, also known as a signature loan.
Some lenders, especially military lenders like Navy Federal Credit Union and PenFed Credit Union, advertise low-interest personal loans with more flexible terms for veterans.
| Pros | Cons |
|---|---|
Property isn't used as collateral Ability to borrow as little as $1,000 or as much as $50,000+, depending on credit history Quick turnaround, often receiving money in as little as one to five business days If you’re paying off other unsecured debt (like credit cards), a personal loan avoids turning unsecured debt into secured debt | Charge origination fees (generally between 1% and 8%) that could be deducted from total loan amount Interest rates usually run higher than those on VA loans Repayment terms are often shorter than home equity products |
The loan amount and APR offered on personal loans tend to differ based on the borrower’s credit score. The following chart shows the average best APRs offered for a $3,000 personal loan on the LendingTree platform in July 2022.
| Credit score | Average best APR offered |
|---|---|
| 760+ | 10.39% |
| 720-759 | 14.26% |
| 680-719 | 19.22% |
| 640-679 | 24.33% |
If you’re looking into personal loans, be sure to shop around for your best rate and look for hidden fees and prepayment penalties.
If you’re a military veteran taking equity out of your home, a VA cash-out refinance could often be your best choice. VA cash-out refinances allow you to access up to 90% of your home’s equity (most other equity loans limit you to 80% or 85%) and offer reasonable interest rates
Many lenders require a credit score of 680 or higher, but it’s still possible to find bad-credit home equity loan lenders. You’ll need to have a significant amount of equity in your home and little other debt. Try an online lender comparison site or visit your local bank or credit union.
A cash-out refinance with bad credit may be easier to find than a home equity loan, as there are many available options, including government-backed programs. Start with your current lender and see what your options might be. And if you’re a veteran, look into a VA cash-out refinance. The VA program doesn’t have a minimum credit score requirement.
If you’ve received a letter in the mail urging you to use your equity reserves before they expire, throw it away. In the world of mortgages, “equity reserves” is just another term for “equity,” but your home equity — or ownership stake in your home — never expires. Many scammers and opportunists use this tactic to pressure homeowners into refinancing, even when that refinance isn’t in their best interest. Always take the time to compare any offer you receive to other available offers before making your final decision, and research each lender’s reputation. It’s easy to compare refinance rates and lenders online and save thousands in the process.