Since 1944 millions of US military veterans have benefited from mortgage loans guaranteed by the Department of Veterans Affairs (VA). VA-guaranteed mortgages are true "zero down," no closing costs home loans for eligible veterans buying homes using them. Also, no private mortgage insurance is needed with a VA-guaranteed mortgage, though many of that particular home loan's features mimic conventional versions. In fact, you can even take out a home equity loan if you have a VA-guaranteed mortgage.
The VA itself isn't a mortgage lender and it doesn't loan money to veterans to buy homes. Rather, the VA guarantees a portion of a veteran's mortgage loan, giving the veteran an easier path to loan qualification in many cases. In general, VA home loans are also fairly liberal in how eligible borrowers can use them to purchase homes. Additionally, there's no barrier to taking out a VA mortgage and seeking out a home equity loan when desired.
VA loans require a maximum 41 percent debt-to-income ratio. Depending on the lender for the equity loa, debt-to-income ratios (DTI) may drop to 31 percent. The DTI takes all debt, including mortgage payments and compares it to income to determine if you can afford the loan.
Taking Out Equity
Two different home equity loan products are used to draw on a typical home's built-up value: home equity loans and home equity lines of credit. Depending on the amount of equity you have in your home, either home equity loans (HEL) or home equity lines of credit (HELOC) may make sense. The rules for HELand HELOC lending are the same for VA mortgages, too. Your VA home loan is the superior lien and any home equity type loans you then take out are junior.
VA Cash-Out Refinancing
Whether you should add a HELOC or HEL on top of an existing VA mortgage depends on what you want from those loan types. Certainly, if you have equity built up in the home you bought using a VA mortgage home equity loans are an option. However, VA cash-out refinancing may also serve your needs better than a HELOC or HEL would. With VA cash-out refinancing, you pull cash equity from your home through your newly refinanced VA home loan.
Refinancing After HELs
If you intend to add a home equity type loan to your VA-mortgaged home, you may have trouble refinancing its mortgage afterwards. Liens on homes assume seniority by their recording date. If your existing VA mortgage were to be refinanced after your new HEL or HELOC. it could be junior to those loans, thereby jeopardizing VA-backed refinancing. Either refinance your VA mortgage before you take out a home equity loan or explore the possibility of VA cash-out refinancing.