Can I Refinance a Conventional Loan to a VA Loan?

Conventional loans are mortgages offered by private lenders and not backed by a government entity, and are a common financing choice for many homeowners. VA loans are guaranteed by the U.S. Department of Veterans Affairs, providing distinct benefits to eligible service members, veterans, and surviving spouses. It is possible to refinance a conventional loan into a VA-backed mortgage, which can offer different financial terms and advantages.

Determining Your VA Loan Eligibility

Eligibility for a VA loan, including a refinance, primarily hinges on a borrower’s service history. Generally, veterans who served 90 consecutive days of active service during wartime, 181 days of active service during peacetime, or more than six years in the National Guard or Reserves may meet the service requirements. Spouses of veterans who died in service or from a service-connected disability may also be eligible. These criteria ensure that the VA loan program serves its intended beneficiaries.

A Certificate of Eligibility (COE) is the official document that confirms a service member’s or veteran’s eligibility for a VA loan benefit. Borrowers can obtain their COE through various methods, including applying online via the VA’s eBenefits portal, requesting it from their chosen VA-approved lender, or submitting a request by mail directly to the VA. Possessing a COE is a fundamental step, as it is required before a VA loan application can proceed.

VA Refinance Options for Conventional Loans

When considering refinancing a conventional loan into a VA loan, the primary program available is the VA Cash-Out Refinance. This type of refinance allows a homeowner to replace their existing mortgage with a new one that is larger than the outstanding balance, with the difference paid out in cash. For those converting a conventional loan, the “cash-out” aspect can simply mean refinancing the existing loan amount into a VA-backed loan, even if no additional cash is taken out. This program allows eligible individuals to leverage their VA loan entitlement to secure a VA-backed mortgage, often with more favorable terms than their current conventional loan.

It is important to understand that other VA refinance options, such as the Interest Rate Reduction Refinance Loan (IRRRL), are not applicable for converting a conventional loan to a VA loan. The IRRRL is specifically designed for refinancing an existing VA loan to a new VA loan, typically to achieve a lower interest rate or change loan terms, without requiring a new appraisal or extensive credit underwriting. Because an IRRRL is exclusively for current VA loan holders, it cannot be used by those with conventional mortgages seeking to enter the VA loan program. The VA Cash-Out Refinance is the appropriate pathway for this type of conversion.

Preparing for Your VA Refinance Application

Before formally applying for a VA refinance, gathering necessary financial information is a crucial preparatory step. Lenders will assess a borrower’s credit score and debt-to-income (DTI) ratio to determine financial suitability for the new loan. While the VA does not set a minimum credit score, most lenders typically look for a score in the mid-600s or higher, and a DTI ratio generally below 41% is preferred, though exceptions can be made based on residual income. These financial indicators help lenders evaluate the borrower’s ability to manage new mortgage payments.

Comprehensive documentation of income and employment is also required. Borrowers will need to provide recent pay stubs, W-2 forms from the past two years, and potentially tax returns if they are self-employed or have complex income structures. These documents enable the lender to verify stable and sufficient income, which is a fundamental component of loan approval. For self-employed individuals, a two-year history of self-employment income is typically reviewed to ensure consistency.

Asset documentation, such as bank statements and investment account statements, will also be requested. These statements demonstrate that the borrower has sufficient funds for closing costs, reserves, or any required down payment, though VA loans often do not require a down payment. Lenders typically review at least two months of bank statements to verify the source and sufficiency of funds. Providing these details upfront can streamline the application review process.

Property-related information is equally important in the preparation phase. Borrowers should have their current mortgage statement readily available to provide details on their existing loan balance and terms. Lenders will also consider the property’s condition, as it will undergo a VA appraisal to ensure it meets the VA’s minimum property requirements (MPRs) for safety, structural soundness, and sanitation. Ensuring the property is in good repair before the appraisal can prevent potential delays.

Navigating the VA Refinance Application Process

The formal application process for a VA refinance begins with selecting a VA-approved lender. Many banks, credit unions, and mortgage companies are authorized to originate VA loans, and it is advisable to compare offers and terms from several lenders. Once a lender is chosen, the borrower will submit their prepared documentation and formal application, which can often be done through online portals, via email, or in person. This official submission initiates the lender’s review of the borrower’s financial profile and the property’s eligibility.

Following the application submission, the property undergoes a VA appraisal. A VA-assigned appraiser evaluates the home’s market value and verifies that it meets the VA’s Minimum Property Requirements. This appraisal ensures the loan amount is appropriate for the property’s value and that the home is safe and habitable. Concurrently, the loan moves into underwriting, where the lender’s underwriting team thoroughly reviews all submitted financial documents, credit history, and the appraisal report to assess the overall risk of the loan.

The underwriting process includes verifying income, employment, assets, and liabilities to confirm the borrower meets all financial qualifications. This stage is where the lender makes the final decision on loan approval based on their specific guidelines and the VA’s requirements. If approved, the final step is closing, where all parties sign the necessary legal documents, including the new mortgage note and deed of trust. Funds are then disbursed, and the new VA loan replaces the conventional mortgage.

Understanding VA Refinance Costs

Refinancing a conventional loan to a VA loan involves several costs, with the VA Funding Fee being a prominent expense. This fee is a one-time payment collected by the VA to help offset the costs of the VA loan program and reduce the burden on taxpayers. For a VA Cash-Out Refinance, the funding fee typically ranges from 2.15% to 3.3% of the loan amount, depending on factors such as whether it’s a first-time use of VA loan benefits or subsequent use, and if there is any down payment. Veterans receiving VA disability compensation are generally exempt from paying this fee.

Beyond the funding fee, borrowers can expect various closing costs similar to those associated with a conventional mortgage. These may include origination fees, which are charged by the lender for processing the loan, appraisal fees for the property valuation, and title insurance to protect both the lender and borrower against title defects. Other common costs include recording fees paid to the local government to officially record the new mortgage, and various administrative charges. Many of these closing costs can often be rolled into the new loan amount, increasing the principal balance, or they can be paid upfront at closing, depending on the borrower’s preference and lender policy.