Whether you want to consolidate debt or even finance home improvements, accessing your home equity can provide the funds you need.
In your search, you may have come across the term “VA loan home equity.” While servicemembers can still access their home equity through other means, it’s important to note that the Department of Veterans Affairs (VA) does not offer an actual VA home equity loan.
However, you shouldn’t let that discourage you. There are still excellent ways to access and build home equity as a VA borrower. For example, instead of a traditional VA home equity loan, you can explore other options such as Home Equity Lines of Credit (HELOCs) or even home equity loans through a second mortgage.
While the VA doesn’t offer a specific home equity loan on a VA loan, there are multiple ways for you to leverage your home’s value.
Key Takeaways
- No VA Home Equity Loan: The VA does not offer a specific home equity loan, but there are still viable ways for VA borrowers to access home equity, such as through HELOCs or second mortgages.
- Home Equity Loans Explained: A home equity loan provides a lump sum of money that is repaid over time with a fixed interest rate, making it suitable for large expenses like home renovations or medical bills.
- HELOCs as an Alternative: A Home Equity Line of Credit (HELOC) allows for borrowing against home equity on an as-needed basis, with a revolving line of credit that offers flexibility for ongoing expenses.
- VA Cash-Out Refinance: This option allows veterans to refinance their mortgage and access up to 100% of their home’s appraised value, but it can come with higher closing costs and interest rates compared to traditional refinances.
- Combining Borrowing Strategies: Veterans can strategically combine a VA cash-out refinance with home equity loans or HELOCs to meet both immediate and long-term financial needs, leveraging their home’s equity effectively.
How does a home equity loan work?
One of the main reasons people like to become homeowners is the ability to build home equity. Home equity can help you access funds for various purposes, providing financial flexibility and security. Simply put, equity is the value of your property beyond the outstanding mortgage balance.
A home equity loan gives you access to a lump sum of money you repay over time, usually with a fixed interest rate. This type of loan allows you to pull money from the equity you’ve built conveniently.
When you take out a home equity loan, you borrow a specific amount based on the current value of your home minus your current mortgage balance. Home equity loans are useful for paying off larger expenses like renovations or medical bills.
With a fixed interest rate, you’ll have predictable monthly payments. This means a home equity loan could make budgeting and planning for the future easier.
Non-VA Loan Products
Two popular non-VA loan products include home equity loans and Home Equity Lines of Credit (HELOCs).
As mentioned above, a home equity loan provides a lump sum of money you repay over time, often with a fixed interest rate, making it ideal for large expenses or debt consolidation. On the other hand, a HELOC is much like a credit card and allows you to borrow against your home’s equity on an as-needed basis and up to a specific limit.
At first glance, these lending solutions may seem quite similar. However, they are quite different in their structure and uses. Let’s dive into the definitions, advantages, and disadvantages of home equity loans and HELOCs.
Home Equity Loans
Obtaining a home equity loan is quite straightforward. It begins with a simple application process with your chosen lender. You can expect to be asked to share some details about your income, credit history, and current home value with your lender.
Unlike a VA cash-out refinance, which replaces your existing mortgage with a larger one, a home equity loan is a separate loan against the house that doesn’t impact your current mortgage. Instead, it offers additional borrowing based on the equity in your home. It comes with its own payment in addition to your current mortgage.
Your lender will likely evaluate your home’s equity, which means they will determine the difference between your home’s worth and how much you still owe. It is common for an appraisal to be required to generate an accurate value.
That said, you can typically borrow up to 80%- 90% of your home’s appraised value minus the amount you still owe on the mortgage. Once everything is in place, you’ll be offered a lump sum of cash that you can use to improve your home, consolidate debt, or even pay off any medical or education expenses.
Conveniently, home equity loans usually come with fixed interest rates, meaning you will receive monthly payments that are consistently the same amount. However, your home equity loan rate may be higher than your mortgage rate, and closing costs can be significant.
Home Equity Lines of Credit (HELOCs)
Through a HELOC, you’ll be approved for a credit limit based on your home’s equity. Many find this option perfect for addressing ongoing expenses or funding projects where you might need access to cash over time versus a lump sum at once.
This can include home improvements, minor educational expenses, and ongoing medical bills. Unlike a VA cash-out refinance, a HELOC will provide a revolving line of credit you can draw from over time. In addition, it typically involves less money received than a VA cash-out refinance or a home equity line of credit.
Once approved, you can draw from the line of credit up to your limit during the “draw period. This draw period can last between 5-10 years, and you only pay interest on the amount you use. When the draw period has ended, you’ll begin repayment for the money you borrowed plus any built interest.
You’ll need to apply with a lender for a HELOC, and you will likely be asked to provide information about your income, credit score, and information to help determine the value of your home. Like with home equity loans, an appraisal may be required to determine how much you can borrow.
Remember that HELOCs can come with variable interest rates, which can fluctuate over time and change your monthly payments. On the plus side, HELOCs often come with lower closing costs than other home equity lending options. While the VA does not offer HELOCs, this option is still likely available through your trusted lender.
VA Cash-Out Refinance
Have significant home renovations that need to be funded? Are there medical bills waiting to be paid? Or, would you like to pay off high-interest debt and consolidate it? A VA cash-out refinance may be the solution you need.
The VA cash-out refinance allows veterans, servicemembers, and eligible surviving spouses to refinance their existing mortgages and withdraw cash based on their home’s appraised value. Depending on the appraisal, you can potentially borrow up to 100% of your home’s value, giving you access to a substantial amount of cash.
Essentially, you replace your current mortgage with a new one which is larger than your existing loan balance. The difference between your new and old mortgage is paid out to you in cash.This loan completely replaces your existing mortgage.
A major benefit of a VA cash-out refinance is that you can borrow up to 100%[2] of your home’s appraised value. Also, compared to other cash-out options, this option typically offers much lower interest rates. As an added bonus, there are no requirements for private mortgage insurance (PMI), which can save you quite a bit over the loan’s life.
Some drawbacks of a VA cash-out refinance to keep in mind include closing costs and interest rates that may be higher compared to traditional mortgage refinance options. There is also the fact that you would be further extending the term of your mortgage, meaning you pay more interest over time.
Combining Options
Did you know you can combine different borrowing strategies to achieve your financial goals? For example, you might start with a VA cash-out refinance to get a lump sum of cash for immediate needs. Then, you can use a home equity loan or HELOC to meet any additional financial requirements that may arise.
This method lets you make the most of your home equity and tailor your approach based on your immediate and long-term needs.
VA Home Equity Requirements
While there is no specific “VA home equity loan,” understanding the requirements for leveraging your home’s equity through VA-approved options is crucial. If you’re considering a VA cash-out refinance or exploring non-VA options, here’s what you’ll need:
- Sufficient Home Equity: You must have enough equity in your home for your lender to justify the loan amount.
- Stable Income: Proof of a steady income to demonstrate your ability to repay the loan.
- Low Debt-to-Income (DTI) Ratio: Your debt-to-income ratio must meet your lender’s specific criteria and threshold.[3]
- Employment History: A stable employment history, usually at least two years with your current employer.
- Home Appraisal: An appraisal to confirm the current market value of your home.
- Consistent Payment History: A solid record of on-time payments on your current mortgage and other debts.
- Documentation: Provide necessary documentation such as proof of income (pay stubs, tax returns), bank statements, and information on any existing debts.
- Typically, a Credit Score of At Least 620: For favorable “VA home equity loan rates” and other financing options, lenders generally look for a credit score of 620 or higher.
Please note that it is recommended that you consult with a real estate professional regarding potential renovations or upgrades before you make any changes.
This way, you can ensure the improvements you make will have a positive impact on your home’s value and maximize your return on investment. The last thing you want is to spend money on “improvements” that either don’t add value or accidentally bring down the value of your property.
Why aren’t there VA home equity loans?
Are you wondering why there isn’t a specific “VA home equity loan” available to servicemembers? The reason is quite simple. The Department of Veterans Affairs (VA) designed its VA loan program to serve a different purpose.
The VA’s mission is to support affordable homeownership for veterans and active duty servicemembers. Essentially, the VA is there to help you buy or refinance your primary home through favorable lending options.
The program wasn’t designed to manage or access home equity. Instead, it aims to support veteran homeownership and make buying or refinancing a home as affordable as possible for those who have served.
While a specific VA home equity loan isn’t in the cards, there are still plenty of accessible ways for you to leverage your home’s equity.
More Reading
Here’s How Your Credit Score Impacts VA Loan Refinancing
VA Renovation Loan: The Complete Guide to VA Home Improvement Loans
VA Streamline Refinance (IRRRL) Loan
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