Military Debt Consolidation Loans for Veterans

10 key points you need to know before you apply for an MDCL.

As a Veteran, you face some unique financial challenges in establishing a stable outlook once you transition to civilian life. Making that transition can be tough, but there are also specialized tools available to Veterans who are working to overcome those challenges to achieve stability.

The information below is designed to help you understand what a Military Debt Consolidation Loan (MDCL) is, how it can help you, and the risks you need to know before you decide to use it. If you have question or need expert advice on your best option for debt relief, we can help. Call Consolidated Credit today at or complete an online application to request a free debt and budget analysis from a certified credit counselor.

#1: A Military Debt Consolidation Loan (MDCL) is a home equity loan

There are two types of debt consolidation loans. An unsecured debt consolidation loan requires no collateral, so the loan is extended to you in good faith based on your credit score and financial situation.

By contrast, a secured debt consolidation loan requires some collateral to secure the loan in case you default. In most cases, the collateral is your home, so you take out what’s known as a home equity loan. You’re essentially borrowing against the value of your home.

#2: You must have a VA home loan in order to qualify

Not all Veterans can use a Military Debt Consolidation Loan. Veterans are only eligible if they already have a VA home loan. Basically, the MDCL – also known as a VA consolidation loan – is like a specialized second mortgage for Veterans.

This means if you aren’t a homeowner or you own a home but didn’t go through the VA to get your loan, you won’t be able to use an MDCL. There are other options available for debt relief, however, so you’re not completely stuck (more on other options in #10).

#3: An MDCL is a “cash-out” loan on your home

As mentioned above, an MDCL means you’re borrowing against the equity in your home. Equity is the value of your home minus the remaining balance on the mortgage. So if you have $80,000 left to pay off on your VA home loan and your home’s property value is $120,000, then an MDCL would net you $40,000 that can be used to pay off your credit cards and other outstanding debts.

It’s important to note that this effectively means you cash out the equity built up in your home, so now you have $120,000 in mortgage debt instead of $80,000 in mortgage debt with $40,000 of equity (which counts as an asset).

#4: You will have to pay closing costs

Almost any time you modify, refinance or take out a second mortgage, you will be required to pay closing costs again to secure the new loan. Closing costs generally equal about 1-5% of the purchase price of your home – in this case with an MDCL that would be 1-5% of the new amount on the loan.

You can use part of the money you get for the MDCL, so if the payout is $40,000 you would get that money minus $1,200 to $6,000 in closing costs, depending on the lender. Make sure you know exactly what your closing costs will be, to see how much it will reduce the final payout.

#5: A MDCL is not a loan issued by the VA

This is a common misconception with all VA loans. The VA is not the lender or the loan servicer. Private financial institutions are still the issuers of VA loans, just as they are with regular civilian consumer loans. The VA simply guarantees as much as 25% of the loan, which allows Veterans to get these loans at lower rates and better terms. There are also caps on what banks can charge for VA loans.

However, you still apply for any VA loan, including a MDCL, through your preferred lender.

#6: An MDCL increases your financial risk

When a service member is on active duty they are offered some key financial protections under the Servicemembers Civil Relief Act (SCRA). This includes protection against foreclosure if you fall behind on your mortgage payments when you’re deployed.

Unfortunately, Veterans are not offered the same protections and, in fact, there are no such protections offered by a VA home loan or an MDCL. If you fail to pay and the loan goes into default, the lender can start a foreclosure action against you. And if you can’t find the right option to save your home, you can lose it in foreclosure.

#7: The MDCL will increase your monthly payments

The monthly payments on the new MDCL loan will be higher than the monthly payments on your current VA mortgage because you’re financing a larger amount. At 4.5% APR, the monthly payments on the remaining $80,000 balance on your home loan should be around $405. The payments on the MDCL at $120,000 at the same 4.5% APR would be around $608.

The good news is that you should have fewer obligations to cover besides the loan. If you’re paying $500 per month on your credit card bills and you pay off those debts in-full with the money you get from the Military Debt Consolidation Loan, then a $200 increase your monthly mortgage payments will still leave you with a net budget cash flow increase of $300.

#8: Market conditions matter

As with any home loan, current conditions in the real estate market will impact the rate you receive on the new loan. Although going through the VA can help you qualify for a lower interest rate on the MDCL, rates are still based on current market conditions.

With that in mind, timing can be a key factor in getting the rate interest rate on your loan. If you apply for a Military Debt Consolidation Loan when rates are low, then you’ll get a lower rate and pay less interest charges over the life of the mortgage. If you apply when rates are high, then your interest rate will be higher and you’ll pay more in total.

#9: If you don’t have equity, an MDCL won’t work

The VA provides definite benefits when you apply for financing, but it can’t help you if the money is not there. Like any home equity loan, an MDCL only allows you to borrow against the equity available in your home. If you have no equity, there’s nothing to borrow against.

So if your home’s value is not significantly higher than the remaining balance on your VA home loan, then an MDCL will not be a viable option. It’s also out of the question if you’re upside on your mortgage – where the property value in your home drops below the remaining balance on your mortgage.

You need significant equity in your home for an MDCL to be the right option for consolidation. Even if you have some equity, you need to make sure it’s enough to work for what you need. For instance, if you have $80,000 left on your mortgage and the home is worth $100,000 that would net you $20,000 for consolidation. However if you have $35,000 in credit card debt to pay off, that amount is not enough to serve the purpose you need it to serve.

#10: An MDCL is not your only option

If you’re worried about borrowing against the value of your home or you don’t have the equity available to serve the purpose you need for debt elimination, don’t fret. There are other options you can use which can help you solve the challenges you face with credit card debt.

A debt management program through a certified credit counseling agency allows you to consolidate without borrowing against your home’s equity. Interest rates are negotiated with creditors individually, and typically range from 0-10% once negotiated. Credit card debt becomes easier to manage once the interest rates are reduced, so you can get out of debt faster even though you may be paying less each month.

Most borrowers who complete the program successfully are debt-free within 5 years even though their total monthly credit card payments are reduced by 30 to 50 percent. Credit counseling agencies may also have specialized programs for Servicemembers and Veterans that offer lower fees.