A home equity loan is a second mortgage that allows you to cash in on the equity in your home. If you obtain a home equity loan, you will make two separate payments each month: one for your mortgage and one for the new loan. Although the U.S. Department of Veterans Affairs doesn't offer home equity loans on its mortgages, it won't stop you from getting one elsewhere.
About VA Mortgages
A VA mortgage is a home loan with partial insurance from the VA. Most VA loans are serviced by private lenders. If you become unable to make your payments for any reason and you have a VA loan, the VA will repay some of the lender's losses. This guarantee from the VA allows lenders to extend loans with more confidence, thus increasing your chances of approval and eliminating the need for private mortgage insurance.
Home Equity Loans
The VA won't guarantee a second mortgage. However, you may still be able to obtain one from a private lender. To qualify for a second mortgage, you must have enough equity in your home to cover the amount you hope to borrow, and your lender must be willing to secure the loan with a lien that is secondary to your first mortgage lien. The lender will also look at your debt and income to make sure that you can afford both mortgage payments.
After you have closed on your VA loan, the VA won't impose any restrictions on your ability to apply for new loans, including a second mortgage. However, if you apply for your VA loan and home equity loan at the same time, the VA requires you to report the second mortgage as a debt on your application. The VA will consider your payment on this debt when determining the maximum loan amount you can afford.
Although the VA doesn't offer second mortgages, you can still take advantage of your equity through the VA by applying for a cash-out refinance. The VA will allow cash-out refinances with loan balances of up to 100 percent of your home's value. If you have a conventional loan or FHA loan and you'd like to switch to a VA loan, you can also use a VA cash-out refinance to do so.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.