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Homeowners who have VA eligibility and want to access their home equity have a variety of options, however a true VA-backed home equity loan is not among them, as the Department of Veterans Affairs only backs first-lien mortgages. Veterans homeowners still have many options they can use to cash out on their home equity. We explore the most readily available loan types for home equity financing, including VA cash-out refinances, home equity loans, and home equity lines of credit and discuss the qualifying criteria and loan structure of each.
- Can You Take Out a Home Equity Loan with an Outstanding VA Mortgage?
- Home Equity Loan Options for Veterans
- Home Equity Lines of Credit (HELOCs) for Veterans
Can You Take Out a Home Equity Loan with an Outstanding VA Mortgage?
It is possible to take out home equity financing if you have an existing VA mortgage, though the VA doesn’t directly endorse or guarantee secondary financing like home equity loans or lines of credit, so don’t bother looking for VA-backed home equity loans.
The VA only insures first lien mortgages on eligible properties — not secondary liens like home equity loans or home equity lines of credit (HELOCs). Although the VA doesn’t back home equity loans or HELOCs, they won’t prevent you from getting one while your VA loan remains outstanding. As long as you have enough equity in your property, equity loan lenders can work with you.
In order to qualify for a home equity loan or line of credit, you’ll need to meet the following criteria:
- Have available equity in the property - Most home equity lenders require that you maintain a certain amount of equity in your property (usually 10%), allowing you to borrow up to 90% of the home’s value between your first mortgage and the equity loan.
- Have an acceptable credit rating and credit score - Minimum score requirements will vary from lender to lender, but few will accept scores below 620. The best rates and terms, however, are available to borrowers with scores of 720 and above.
- Demonstrate the ability to repay the loan - Underwriting requirements are determined by individual lenders, but your debt-to-income ratio and available assets and reserves will be used to determine your ability to repay both your first mortgage and the equity loan.
Home Equity Loan Options for Veterans
There are several viable alternatives for cashing out equity if you have an existing VA loan. These include cash-out refinancing, home equity loans, and home equity lines of credit — either through traditional lenders or specialty military lenders. For those of you who insist on a VA-backed mortgage, the VA Cash-out refinance will be the most similar option to a true "VA-backed home equity loan," and will generally carry lower interest rates than comparable home equity loans and HELOCs.
VA Cash-out Refinance:
Since VA loans already allow for up to 100% financing, you may consider accessing your equity through a cash-out VA refinance loan, especially if current VA rates are lower than your existing VA mortgage rate. A VA cash-out refinance accomplishes the dual purpose of refinancing your mortgage and paying you cash at closing in accordance with how much home equity you have in your property.
Qualifying Criteria for VA Cash-out:
To undergo a VA cash-out refinance, you must qualify for the new loan based on your income, assets, and credit just like on your original application. You’re also required to pay the VA funding fee again unless you qualify for an exemption. This could cost up to 3.3% of your loan amount, so it’s important to factor this cost into your decision. Here are the minimum requirements for a VA cash-out refinance:
- Credit score of 620 or greater.
- Debt-to-income ratio of 43% or less
- Loan-to-value not to exceed 100% (not including the closing costs and funding fee)
- Sufficient residual income (as determined by your location and household size)
- No derogatory events reporting on credit, especially prior VA loan foreclosure
Military lenders who cater to active duty members, veterans, and their families often have specially structured home equity loan products. These loans are not backed or insured by the VA, however, and don’t require any VA funding fees.
Fundamentally, the products and services offered by military lenders and their civilian counterparts are very similar when it comes to qualifying criteria and getting your loan approved. Both will confirm your ability to repay the loan, and will calculate how much you can borrow based on your loan-to-value ratio.
There are also a few key differences between specialty military lenders and civilian lenders. They often allow for a higher loan-to-value percentage than most civilian lenders, and offer greater access to equity funds. Their exclusive membership and focus on military personnel, veterans and their families makes them an attractive option for home equity loans and lines of credit.
Some popular lenders with a military focus include credit unions like Navy Federal and Pentagon Federal. These lenders offer a broad variety of products with membership limited to veterans, service members and their families.
Navy Federal Credit Union offers home equity loans with the following features:
- Ability to borrow up to 100% of your home's equity
- Loan amounts from $10,000 to $500,000
- Fixed interest rates for the life of the loan
- No application or origination fee
- Interest-only options
- Terms of 5, 10, 15, or 20 years
Pentagon Federal Credit Union offers home equity loans with the following features:
- Ability to borrow up to 90% of your home’s equity
- Loan amounts from $10,000 to $400,000. Maximum loan amount is $250K for 85.01% to 90% loan-to-value.
- Fixed monthly payments
- Interest-only options
- Terms of 5, 10, 15, or 20 years
Home Equity Lines of Credit (HELOCs) for Veterans
Unlike home equity loans, home equity lines of credit offer the flexibility to borrow and repay funds throughout the loan’s draw period, so you’re only borrowing as much as you need without having to pay interest on the entire loan amount. The Department of Veterans Affairs also does not back HELOCs, so you will need to rely on private banks and credit unions. Both military lenders and civilian banks and credit unions offer HELOCs, though they tend to be less common than fixed-rate home equity loans.
Military Lender HELOCs
Specialty military lenders offer HELOCs to active military personnel, veterans, and their families, often at higher allowable loan-to-value percentages and competitive rates and terms. Their focus on serving the military community can translate to an easier, less expensive process for their members.
Military lenders like Pentagon Federal Credit Union and Navy Federal Credit Union offer HELOC products that allow for higher-leverage loan amounts and have the following features:
|Navy Federal Credit Union||Pentagon Federal Credit Union|
|Ability to borrow up to 95% of your home’s equity||Ability to borrow up to 90% of your home’s equity|
|Loan amounts from $10,000 to $500,000||Loan amounts from $10,000 to $400,000 (Maximum loan amount is $250K for 85.01% to 90% loan-to-value)|
|Variable interest rates based on the US Prime rate||Variable interest rates based on the US Prime rate|
|No application, origination, annual or inactivity fee||Most closing costs are covered by the lender, certain restrictions apply|
|Interest-only options||Non-owner occupied loan options|
|20-year draw period followed by 20-year repayment period||Varies|
Additionally a number of other lenders with a prominent military skew include Veterans United, USAA and Freedom Mortgage, although Navy Federal and Pentagon Federal are among the few military lenders who offer true home equity loans and HELOCs.
Traditional, civilian lenders like banks and credit unions also offer home equity line products as well, even if you have a VA first mortgage outstanding. They often cap your ability to borrow at 80% - 90% loan-to-value, and are less lenient than comparable military lenders. It’s therefore important to have an accurate assessment of your home value before applying for a HELOC at your local bank or credit union.
It’s also important to note that the VA does prefer that any secondary financing not impede your ability to sell the home, or have the loan assumed. Basically, you’ll want to make sure your home equity loan doesn’t restrict your ability to sell any more than the VA guidelines on your first mortgage. Take a look at some of our recommendations for home equity lenders if you're looking to start the shopping process.