The VA loan represents one of the greatest financial benefits available to veterans. Most veterans purchase their first homes with one of these mortgages. However, certain situations exist where a conventional loan makes more sense for veteran borrowers. As such, we’ll use this article to explain how to refinance a VA loan to conventional.
Refinancing a mortgage is a big decision that requires careful consideration of the pros and cons. This is especially true when deciding whether to refinance a VA loan into a conventional loan. As a veteran or active military member, you worked hard to earn your VA home loan benefits. So should you give them up to refinance into a conventional loan? There are valid reasons to make the switch, but you shouldn’t do it without understanding the trade-offs.
What is a VA Loan?
The VA loan program helps veterans, active duty military members, reservists and certain surviving spouses buy a home with no down payment and no private mortgage insurance (PMI). These government-backed loans come with lower interest rates than conventional mortgages, making them more affordable.
To qualify for a VA loan, you must have served at least 90 days of active duty during wartime or 181 days during peacetime The home must be your primary residence VA loans also limit the fees lenders can charge.
What is a Conventional Loan?
Conventional loans are mortgages that are not backed by a government agency, Most conventional loans require a down payment of at least 3-20% of the purchase price and PMI if you put down less than 20%,
Conventional loans typically have stricter credit score and debt-to-income requirements than government loans. However, they may offer lower interest rates, especially if you have excellent credit and a sizable down payment.
Reasons to Refinance a VA Loan to a Conventional Loan
Here are some potential benefits of refinancing a VA mortgage into a conventional loan:
1. Lower Interest Rate
The main reason to refinance any mortgage is to reduce your interest rate and monthly payment. This depends on your current VA loan rate versus today’s rates. Refinancing could make sense if you can get at least 0.5 percentage points lower rate.
Conventional loans often have lower rates for borrowers with high credit scores and low debt-to-income ratios. If you’ve substantially improved your credit since getting your VA loan, you may now qualify for top-tier conventional rates.
2. Avoid the VA Funding Fee
All VA loans charge an upfront VA funding fee, which is a percentage of the loan amount. For example, the fee is 2.3% for a VA cash-out refinance. This fee gets added to your loan balance. Conventional loans have no funding fee.
3. Access Your Home Equity
VA mortgages limit how much cash you can take out when refinancing. With a conventional cash-out refi, you may be able to tap more of your home’s equity. This can provide funds for home improvements, debt consolidation, college costs or other expenses.
4. Remove VA Loan Limits
VA mortgages have regional loan limits on how much you can borrow. The 2023 baseline limit is $653,000 but amounts vary by county. Conventional loans have no set limits, so you may be able to get a higher loan amount by refinancing.
5. Shorter Loan Term
The maximum term on VA loans is 30 years. Some lenders offer shorter terms for conventional loans, such as 10, 15 or 20 years. The higher monthly payments can help you pay off your mortgage faster and save on interest.
6. Remove Occupancy Requirements
To qualify for a VA refinance, the home must have been your primary residence at some point. This requirement does not apply to conventional loans. If you have moved and want to refinance the rental property or vacation home you originally purchased with a VA loan, switching to a conventional loan makes this possible.
7. Simpler Process
VA streamline refinances come with less paperwork than regular refinances, and lenders process them faster. But documents are still required to verify your VA eligibility. With a conventional loan, the refinance process is generally simpler for non-VA borrowers. Closing often takes less time too.
Drawbacks of Refinancing a VA Loan
Refinancing into a conventional loan also comes with some potential disadvantages:
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Loan costs – Closing costs are often higher for a conventional refinance versus a VA streamline because conventional loans require a new appraisal.
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Higher payments – Conventional loans require PMI if your down payment is under 20%. The PMI premium gets added to your monthly mortgage payment.
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Lost VA benefits – Once you refinance into a conventional loan, you no longer have the option to refinance or purchase again with a VA loan in the future.
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Risk of foreclosure – VA loans make it easier to avoid foreclosure if you run into financial hardship, thanks to options like VA loan modifications. These protections don’t apply to conventional mortgages.
Refinancing to a Conventional Loan: Who Should Consider It?
Refinancing a VA mortgage to a conventional loan can be a smart move in certain situations:
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Your credit, income and savings have improved considerably since you got the VA loan. This may help you qualify for better conventional rates.
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You have significant equity built up in the home and need to cash out a substantial amount.
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You no longer live in the home purchased with a VA loan and want to remove residency restrictions.
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Your loan amount has hit or is approaching your county’s VA limit, and you need to borrow more.
Just make sure the long-term savings from the refinance outweigh the upfront costs. Shop multiple lenders to compare loan estimates and choose the optimal loan program.
How to Refinance a VA Loan to a Conventional Loan
Here is an overview of the process to refinance a VA mortgage into a conventional loan:
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Check your eligibility – Confirm you meet credit score, income, and other requirements for conventional loans.
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Shop mortgage rates – Compare quotes from multiple conventional lenders to find the best rates and terms. Inform lenders you want to refinance an existing VA loan.
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Choose a lender – Select your lender after reviewing loan estimates side-by-side. Make sure you understand the new loan’s fees, closing costs, and other key details.
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Submit your application – Provide documents to verify income, assets, employment, and other financial information the lender requires.
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Get an appraisal – The lender will order an appraisal to determine the current value of the home. Make sure the home is in good condition before the appraiser visits.
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Receive loan approval – When underwriting is complete, your lender will inform you of your official loan approval and terms.
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Close on your refinance – After signing final loan documents, the old VA mortgage will be paid off and the new conventional mortgage will take effect.
Alternatives to Refinancing into a Conventional Loan
If you currently have a VA loan, but a conventional refinance is not the optimal choice, consider these alternatives:
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Lower your VA rate – Refinance into another VA loan at a lower interest rate to reduce your monthly payment. Closing costs may be minimal if you opt for a VA streamline.
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Tap equity with a VA cash-out – If you need to access your home equity, a VA cash-out refi provides more cash than a conventional loan in some cases.
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Get a home equity loan – Rather than doing a full mortgage refinance, consider taking out a VA or conventional home equity loan or line of credit. This requires fewer fees and less paperwork.
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Don’t refinance – If closing costs are high and interest rate savings modest, it may make more sense to stick with your current VA loan as is.
The Bottom Line
Refinancing a VA home loan into a conventional mortgage opens up more options – like pulling out substantial cash or removing residency restrictions. For some borrowers, it can also provide access to better rates and terms.
However, you should think carefully before giving up your hard-earned VA benefits for good. Look at all aspects of the two loans side-by-side and run the numbers to determine if switching to a conventional loan is the optimal financial move based on your individual situation and goals.
See What You Qualify For
Select a VA Home Loan Option to Continue:
The Department of Veterans Affairs doesn’t actually lend money. Instead, the VA guarantees a portion of each VA loan made by private lenders (e.g. banks, credit unions, etc.). This guarantee protects these lenders from default. In other words, if a veteran stops paying back his or her VA loan, the government will reimburse a portion of the outstanding loan balance to the lender.
Due to this protection, lenders face far less risk with these loans. And, they pass this reduced risk on to veterans by offering outstanding terms for VA loans. Of note, VA loans:
- Do not require a down payment.
- Offer extremely competitive interest rates.
- Do not require private mortgage insurance, or PMI.
- Allow for a streamlined refinancing through the IRRRL program.
These advantageous terms lead many veterans into using the VA loan to purchase their first home.
Despite all the positives inherent to VA loans, they are certainly not the only mortgage option for veterans. Borrowers can also use a conventional loan to purchase a home – or to refinance an existing mortgage. However, before explaining why a veteran would want to refinance from a VA loan to conventional one, we need to actually define conventional loans.
Whereas VA loans are backed by a government agency, conventional loans are not. In other words, if a borrower stops paying back a conventional loan, the government isn’t going to reimburse the lender. Rather, lenders assume all the risk with conventional loans. Due to this increased risk, conventional loans do not offer many of the same benefits as VA loans (e.g. no down payment, no PMI, lower credit scores).
Typically, conventional loans make the most sense for homebuyers with high credit scores (at least 740) and enough cash for a 20 percent down payment. Broadly speaking, these loans fall into two categories: conforming and non-conforming. A conforming mortgage follows Fannie Mae and Freddie Mac lending rules, and a non-conforming one does not.
How to Refinance Your VA Loan to Conventional
After reviewing the above, if refinancing from your current VA loan to a conventional loan makes sense, here are the steps to do it:
- Step 0 – confirm your equity (optional, but recommended): While you don’t need to have 20 percent equity in your home to refinance into a conventional loan, you’ll have to pay PMI if you do not. You’ll need to factor these additional payments into your monthly budget. To save money in this step, you can use a home value estimator like Zillow for a rough value. But, you’ll still need to pay for a formal appraisal during the refinance loan closing process.
- Step 1 – confirm your credit score: To qualify for the best loan terms, you’ll want a credit score over 740. However, some lenders will allow you to refinance into a conventional loan with a 620 or higher. If you have a lower score than this, chances are you won’t qualify for any conventional refinance programs.
- Step 2 – confirm your debt-to-income ratio (DTI): Lenders use debt-to-income ratio as a measure of a borrower’s ability to repay debt. To calculate it, add up all your monthly debt payments (e.g. car loans, credit card payments, student debt, and your future mortgage payment) and divide them by your gross monthly income. Most lenders will want to see a DTI below 40 percent, though some will allow as high as 50 percent.
- Step 3 – compare options: Once you’ve confirmed your financial health in the above steps, you’ll want to actually compare conventional refinance quotes from different lenders. These comparisons will help you decide which conventional refinance makes the most sense for your situation. At a minimum, you should compare: 1) APR (the effective interest you’ll pay on a loan, including fees); 2) closing costs; and 3) loan terms (e.g. 15-, 20-, 25-, vs. 30-year loans).
- Step 4 – apply and close on the loan: After selecting the best conventional refinance option, you’ll need to apply for the refinance loan. This will include submitting all of your financial information, completing a formal home value appraisal, and submitting any additional information the lender requires. The closing process will be essentially the same as a home purchase closing, except there won’t be a seller involved. You will sign the closing documents with either a settlement agent or a real estate attorney.
- Step 5 – apply for the VA one-time restoration of entitlement (optional): If you refinanced your VA loan to a conventional one in order to use the VA loan a second time, you’ll need to file paperwork with the VA. Specifically, you’ll need to request the one-time restoration of entitlement by filling out a Request for a Certificate of Eligibility, VA Form 26-1880 and sending it to the VA regional loan center for your state.
The VA loan provides many veterans an outstanding option for buying their first homes. But, situations exist where a conventional loan makes more sense. And, depending on your situation, refinancing from a VA loan to a conventional one may be a great option. By following the steps outlined above, you’ll be able to do just that.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
When should you refinance a VA loan to a Conventional loan?
FAQ
Can you refinance a VA loan to a conventional loan?
Is it worth refinancing my VA loan?
How long after a VA loan can you refinance?
Should I refinance my VA loan to a conventional loan?
VA loans require no mortgage insurance, so your cost may rise by refinancing into conventional. Check your conventional refinance eligibility. Before refinancing your VA loan to a conventional loan, it’s crucial to weigh several key factors that can significantly impact your financial situation.
How do I refinance a VA loan?
1. Determine your refinancing goal. For example, if you want to lower your monthly payments on an existing VA loan, you’ll choose a VA streamline refinance. Or if you want to switch from a conventional mortgage to a VA loan, then a cash-out refinance is the right choice.
How much does a VA refinance cost?
VA refinance loans typically come with the same fees as other mortgage refinances, but there is one fee that’s unique to the program: the VA funding fee. As of April 7, 2023, the following fees apply: The funding fee on an IRRRL is 0.5% of the loan amount. On a VA cash-out refinance, it’s 2.15% of the total loan unless it’s not your first VA loan.
Can you refinance a non VA loan?
Additionally, VA-backed cash-out refinance loans may be used to switch from a non-VA loan, such as a conventional mortgage, to a VA loan. Extra payments or refinancing can simplify paying off your mortgage early. When you refinance into a new VA loan, you’ll go through a private bank, mortgage lender or credit union to do so.