Can I Convert My VA Loan to a Conventional Loan?
Considering converting your VA loan to a conventional one? Learn the possibilities, what's needed, and the steps to make this financial move.
A VA loan is a mortgage offered through a U.S. Department of Veterans Affairs (VA) program, available to eligible active-duty service members, veterans, and surviving spouses. These loans are issued by private lenders but are backed by the federal government. This backing allows for benefits such as no down payment in most cases and no private mortgage insurance. In contrast, a conventional loan is a mortgage not insured or guaranteed by a government agency, like the VA, Federal Housing Administration (FHA), or U.S. Department of Agriculture (USDA). These loans are widely available from various lenders, including banks and credit unions. Converting a VA loan to a conventional loan is not a direct change of loan type but rather involves refinancing the existing VA loan into a new conventional mortgage.
Understanding Why to Convert
Homeowners consider refinancing their VA loan into a conventional loan for financial and personal reasons. Accessing home equity through a cash-out refinance is a common motivation. A conventional cash-out refinance provides cash by paying off the existing mortgage with a larger new loan. While VA cash-out refinances also exist, a conventional loan might be chosen if the borrower no longer qualifies for VA benefits or seeks different terms.
Removing a non-veteran co-borrower from the loan is another reason to consider this conversion. If the original VA loan included a non-military co-borrower, refinancing to a conventional loan can simplify the ownership structure if that co-borrower is no longer involved. This allows the veteran to assume sole responsibility for the mortgage.
Freeing up VA loan entitlement for future property use is a significant motivation. VA loan entitlement is a benefit that can be reused, but it is tied to an active VA loan. By refinancing the current home with a conventional loan, the veteran’s full VA entitlement can become available again for a future home purchase using another VA loan.
Seeking different loan terms or interest rates is another factor, though VA loan rates are often competitive. If a borrower’s credit score has significantly improved, they might qualify for more favorable conventional interest rates or terms. Conventional loans may also offer more flexibility regarding property requirements compared to VA loans.
Meeting Eligibility and Requirements
Qualifying for a conventional refinance involves meeting specific criteria set by lenders. Lenders typically require a minimum credit score, with most conventional loans needing at least a 620 FICO score. Higher scores, often 740 or above, can result in more favorable rates and terms.
The debt-to-income (DTI) ratio represents the percentage of monthly income allocated to debt payments. For conventional loans, the standard maximum DTI ratio is often around 45%, though some lenders may approve up to 50% for borrowers with strong credit scores. This ratio ensures sufficient income remains to manage new mortgage payments.
Loan-to-value (LTV) ratio and home equity are considerations; LTV is the loan amount divided by appraised value. Conventional loans require sufficient home equity, especially for cash-out refinances, determined by a new appraisal. If the LTV ratio exceeds 80%, private mortgage insurance (PMI) is usually required. PMI protects the lender and is paid monthly until 20% equity is reached, differing from the VA funding fee, a one-time charge on VA loans, though some veterans are exempt.
Stable income and employment verification is required. This involves submitting documentation like W-2 forms, pay stubs, and tax returns to confirm repayment ability. A new property appraisal will determine the current market value, essential for calculating the LTV ratio and new loan amount. Borrowers should also anticipate closing costs, which can include origination and appraisal fees.
Navigating the Conversion Process
Refinancing a VA loan to conventional involves procedural steps, beginning with lender consultation. Contact multiple lenders, including large banks and local credit unions, to compare interest rates, terms, and closing costs. Discussing specific refinance goals, such as a cash-out or rate-and-term refinance, helps find the most suitable offer.
After selecting a lender, submit the formal application. This involves providing all necessary financial documents to assess eligibility. Accurate and complete submissions streamline the process.
After application submission, the loan enters underwriting. The lender verifies all submitted information, including income, employment, and credit history, to assess loan risk. This review ensures the borrower’s profile meets conventional loan guidelines.
During underwriting, the lender orders a new property appraisal to determine its current market value. A title search confirms clear ownership and identifies liens. These steps secure the lender’s investment and ensure the property’s value supports the new loan.
The process culminates at closing. Here, the borrower signs the new conventional loan documents. Funds from this new loan pay off the existing VA loan, converting the mortgage type. This concludes the refinance, transferring the mortgage from VA-backed to conventional.
In the post-closing phase, the original VA loan’s lien is released, and new conventional loan terms take effect. Borrowers ensure all paperwork reflecting the change in loan type is correctly processed and recorded. The new conventional loan will have its own payment schedule and terms.