Studies show that almost 35% of service members can’t pay their bills on time. About 27% of them have more than $10,000 in credit card debt.
With inflation and the economic fallout of COVID-19, staying out of debt has become an everyday war for military families. There is a proven battle plan, however.
Debt consolidation loans and programs have helped millions of consumers. Simply put, high-interest debt like credit cards and payday loans are combined into one bill. It’s paid from a low-interest loan you get on your house.
Though your total debt doesn’t change, the reduced interest charge allows you to make a single monthly payment that’s lower than the combined bills you were previously on the hook for.
While debt consolidation has benefits for civilians, it has even more ways to help veterans and active-duty military members. Here are the basics:
Financial struggles can happen to anyone, including veterans and active duty servicemembers. High credit card balances, medical bills, payday loans – it’s easy to find yourself buried under a mountain of debt. When this happens, debt consolidation loans allow you to roll multiple debts into one new loan, often with a lower interest rate and monthly payment. But does the VA offer this type of relief?
The short answer is yes. The VA offers a specific type of debt consolidation loan called the Military Debt Consolidation Loan (MDCL) also known as the VA Consolidation Loan. This loan is only available to veterans and active duty servicemembers who currently have a VA home loan.
What is a VA Debt Consolidation Loan?
A VA debt consolidation loan allows eligible veterans and servicemembers to refinance their current VA home loan for a higher amount than what they currently owe. The funds above their current mortgage balance can then be used to pay off other unsecured debts like credit cards, medical bills, payday loans, etc.
It works just like a regular debt consolidation loan
- You take out one new loan for a higher amount, using the extra funds to pay off multiple unsecured debts
- You make one monthly payment to one lender at a fixed interest rate
- This is often at a lower interest rate than high-interest credit cards or other debts
VA debt consolidation loans are considered “cash out” refinances because you are taking equity out of your home. If your home is worth more than what you currently owe on your mortgage, those funds can be “cashed out” to pay other debts.
For example:
- You currently owe $80,000 on your VA mortgage
- Your home is worth $100,000
- You qualify to refinance and take out a new $100,000 VA loan
- After paying off your current $80,000 mortgage, you have $20,000 left over to pay off credit cards, medical bills, etc.
What Are the Benefits?
There are several advantages to using a VA debt consolidation loan compared to other options:
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Lower interest rates – VA loans typically have lower interest rates than banks, credit cards, payday lenders, etc. This saves you money over the life of the loan.
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Lower monthly payments – By extending your repayment term and lowering your interest rate, your monthly mortgage payment often goes down significantly. This improves cash flow.
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Pay off high-interest debts – Credit cards often have interest rates of 15% or higher. By rolling this unsecured debt into a secured VA loan with a lower rate, you pay off debt faster.
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Avoid bankruptcy – For veterans struggling with debt, VA consolidation may help you avoid having to file bankruptcy.
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Keep your home – The new VA loan allows you to tap equity in your home to pay off other debts, while still keeping your home.
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Long repayment terms – VA loans can be repaid over 30 years or less. This keeps monthly payments low.
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No prepayment penalties – You can choose to pay off your VA consolidation loan early with no penalty.
What Are the Drawbacks?
While VA consolidation loans offer many benefits, there are also some downsides to consider:
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You will lose home equity when you consolidate unsecured debts into your VA mortgage.
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Tapping equity increases your loan-to-value ratio, raising your risk of being underwater on your mortgage if home values decline.
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Closing costs must be paid to process the new loan. These can range from 2% to 6% of the total loan amount.
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Your home is used as collateral for what is now secured debt. Defaulting on the new loan puts your home at risk of foreclosure.
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Your monthly mortgage payment may go up after the intro APR period ends, depending on your credit and the type of VA loan you qualify for.
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Consolidating debt does not address the root spending issues that caused the debt in the first place. Financial education may be needed.
Who Qualifies for a VA Debt Consolidation Loan?
To be eligible for a VA debt consolidation loan, you must meet these requirements:
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You must be an eligible veteran or servicemember.
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You must have an existing VA home loan, such as a VA purchase loan, Interest Rate Reduction Refinance Loan (IRRRL), or VA cash-out refinance.
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You must still own the home used to obtain your current VA loan.
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Your home must have enough equity to support refinancing for a higher loan amount.
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You must qualify based on your current income, credit score, and overall finances. VA has lower requirements than conventional loans in some areas but underwriting standards still apply.
If you have an existing VA mortgage but your home’s value has dropped, refinancing may still be possible. The VA does not have a minimum home equity requirement. Ask a lender if you still qualify for refinancing with your current home value and loan balance.
Spouses may apply for a VA consolidation loan on their own as long as they were an original co-borrower on the current VA loan being refinanced.
How Do I Apply for a VA Debt Consolidation Loan?
To get started consolidating your debt with a VA loan, follow these steps:
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Contact a VA-approved mortgage lender to prequalify. Ask if you meet initial requirements for a cash-out refinance or IRRRL based on your finances and home value.
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Compile your documents and financial information for the loan application:
- 2 months of bank statements
- Tax returns for past 2 years
- W2s and paystubs
- Details on all debts and monthly expenses
- DD214 discharge papers
- Certificate of Eligibility if not on current VA loan
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Complete the full loan application and provide required documentation to verify your financial situation. Allow the lender to check your credit.
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Get a professional appraisal done on your home to verify its current value.
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Receive a Loan Estimate from your lender showing expected loan terms, interest rate, and closing costs.
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Review disclosures and sign your loan closing documents.
It can take 45 to 60 days to close on a VA cash-out refinance. Rates and terms are not finalized until the loan closes.
How Much Cash Can I Take Out with a VA Loan?
When refinancing to consolidate debt, the amount of cash you can take out with a VA loan depends on these factors:
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Loan to Value (LTV) Ratio – The VA does not limit LTV, but most lenders cap it at 100%. LTV is the new loan amount divided by the home’s value.
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VA County Limits – There are maximum VA loan limits based on the county where you live. Standard limits range from $420,000 to over $800,000.
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Home Value – If your home appraises for less than your requested loan amount, you’ll need to adjust the amount.
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Underwriting – The lender will determine the maximum loan amount you qualify for based on your income, debts, credit, and other finances.
Make sure to communicate to your lender the total amount of unsecured debt you want to consolidate so they can identify your maximum approval amount. Take out the least amount needed to pay off those debts.
What Fees or Costs Are Involved?
When refinancing an existing VA loan to take out cash, you can expect to pay:
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VA Funding Fee – This ranges from 1.4% to 3.6% of the total loan amount. It is lower for IRRRL refinances. Funding fees help offset the VA’s risk as loan guarantor.
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Closing Costs – Paid to the lender to process the new loan. May include origination fee, appraisal fee, title search, filing fees, etc. Typically 2% to 6%.
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Prepayment Penalty – Some VA loans have a penalty if refinanced within the first 1-5 years. IRRRL refis do not.
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Interest – You will pay interest on the new higher loan amount at your new rate. Total interest paid increases when you consolidate unsecured debts into your mortgage.
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Lost Home Equity – Refinancing to take cash out reduces the equity you have built up in your home over time.
To get the most savings from your consolidation loan, your interest rate reduction should exceed fees paid at closing. Compare total costs against expected monthly savings.
Pros and Cons of Using a VA Consolidation Loan
Weigh these key pros and cons when deciding if consolidating with a VA loan is the right choice:
Pros
- Lower interest rate than credit cards and other debt
- Lower monthly payments
- Pay off debts faster
- Keep your home
- Avoid foreclosure or bankruptcy
- Won’t affect GI Bill eligibility
Cons
- Pay closing costs and VA funding fee
- Lose home equity
- Mortgage debt increases
- Monthly mortgage payment may increase later
- Risk foreclosure
Military & Veteran Consolidation Loan Options
MDCLs are typically used to pay off credit cards and other high-interest debts. Home loans have much lower interest rates, and VA rates are even lower than average consumers can get.
At the end of 2021, the average rate for a 30-year fixed mortgage was 2.72%. It was 2.99% for a conventional mortgage.
Consider that the average credit card interest rate was 17%, and that an MDCL can be paid off over 15, 20 or 30 years. That could significantly reduce your monthly debt burden.
There are other debt consolidation options to consider. As always, they have pros and cons.
- Personal Loans: These are loans through banks, credit unions or online lenders, and they typically have higher interest rates than MDCLs.
- Home Equity Loans: These are second mortgages in which you apply for a loan based on the equity you’ve built. If you owe $150,000 on a $250,000 loan, you can apply for up to $100,000. You get a lump sum and make monthly payments. But the average interest rate was over 6% in the first quarter of 2022, so you’d save more money with an MDCL.
- Balance Transfer Cards: These offer 0% interest rates for an introductory period, usually 6-18 months. You transfer debt from other cards to the new ones. It’s a decent move, but only if you pay off the debt before the introductory period expires. That’s when the interest rate skyrockets.
- Family or Friends: If you have a rich aunt or uncle, they might float you some cash. But many loans to family members or close acquaintances have gone sour and ruined relationships.
Military Debt Consolidation Loan Benefits and Disadvantages
The possibility of foreclosure is one of the downsides of an MDCL, but there are plenty of plusses. Here are some things to consider.
- Qualifying for an MDCL is easier than conventional consolidation loans.
- There are lower credit-score and debt-to-income requirements.
- Longer repayment terms.
- No monthly mortgage insurance premiums.
- No repayment penalties.
- Allows you to more easily build your credit score.
- Able to access DOD’s Homeowners Assistance Program (HAP).
- Loss of equity in your home.
- Risk of foreclosure if payments aren’t made.
- Paying closing costs can lessen the expected gain from consolidating debt.
DON’T Do Debt Consolidation Without Knowing this ESSENTIAL thing
FAQ
Does the VA do consolidation loans?
Can I get a loan from VA to pay off debt?
Does the VA have a debt relief program?
Can I get a debt consolidation loan from the government?
What is a VA debt consolidation loan?
VA debt consolidation loans are backed by the VA, which loosens the qualifications for borrowers. When you are just getting your financial health under control, this is an excellent loan to manage higher interest debt and improve your financial wellbeing. A VA cash-out refinance allows you to tap into your home’s equity and get a cash payment.
Can veterans get a debt consolidation loan?
Debt consolidation loans help borrowers roll all of their outstanding debts into one loan with a single payment. Some borrowers face challenges in getting these loans, but the Department of Veterans Affairs (VA) offers some debt consolidation options to active duty servicemembers and veterans, including the VA Military Debt Consolidation loans.
What debt consolidation options are available for veterans?
Debt consolidation options for veterans include home equity loans, personal loans, and balance transfer cards. Debt consolidation isn’t right for every veteran. Debt resolution may be a more affordable alternative. What is debt consolidation for veterans? Service members do a lot of growing up during their active duty years.
Does the VA offer a military debt consolidation loan (MDCL)?
Some lenders offer a Military Debt Consolidation Loan (MDCL). There is no mention of this product on the VA’s website and the VA does not back home equity loans. If a lender is promoting an MDCL cash-out refinance that’s only available to eligible veterans, it’s a VA cash-out refinance mortgage.