Can I Refinance My VA Loan to a Conventional Loan?

Homeowners with a VA loan can refinance into a conventional loan. This article explores the reasons for such a decision, the process involved, and the implications of transitioning from a VA-backed mortgage. Understanding these elements helps homeowners determine if this path aligns with their financial goals.

Reasons to Refinance a VA Loan to Conventional

Homeowners refinance VA loans to conventional loans for greater financial flexibility or different property use.

A common reason is to free up the veteran’s VA loan entitlement for future use. Refinancing makes the entitlement used for the first property available again, allowing the veteran to use a VA loan for another primary residence.

Another benefit arises when a co-borrower on the VA loan is not a veteran or spouse. Conventional loans offer more flexibility in removing such individuals, which is desirable if financial circumstances change or the primary borrower wants sole responsibility.

Eliminating the VA funding fee is another reason. While some veterans are exempt, it is a one-time upfront cost on VA loans, ranging from 0.5% to 3.3% of the loan amount. Refinancing avoids this fee on future transactions.

Refinancing can also provide access to lower interest rates or different loan products if market conditions are favorable and the borrower’s credit profile has improved. A strong credit score may lead to better terms on a conventional loan than VA loans typically offer.

Changing the property’s use, such as converting a primary residence into a rental, is another reason. VA loans have occupancy requirements, but a conventional loan allows the property to be used as a rental while freeing up VA entitlement for a new primary home.

Eligibility for a Conventional Refinance

Qualifying for a conventional refinance requires meeting specific criteria focused on the borrower’s financial health and the property’s value.

A strong credit score is a primary factor; most lenders require a minimum of 620. Higher scores lead to more favorable loan terms, with 760 or higher providing access to the lowest interest rates.

The debt-to-income (DTI) ratio is another factor, comparing total monthly debt payments to gross monthly income. While some conventional loans allow a DTI up to 50%, many lenders prefer below 36% or 43%. DTI calculation sums all monthly debt obligations, including the new mortgage payment, divided by gross monthly income.

The loan-to-value (LTV) ratio determines the equity required. Conventional refinances require at least 20% equity to avoid Private Mortgage Insurance (PMI), meaning the loan should not exceed 80% of the home’s appraised value. If LTV is above this, PMI will be required, adding to the monthly payment.

Lenders require thorough income and employment verification, such as recent pay stubs, W-2 forms, and bank statements, to confirm stable income.

Property requirements include an appraisal to determine the home’s market value, safeguarding the lender from over-financing. The appraiser assesses the property’s condition, size, location, and compares it to similar, recently sold homes.

While conventional loans do not have the same strict property condition requirements as VA loans, the property must be residential, accessible, and have operational essential systems like plumbing and electrical.

The Conventional Refinance Procedure

The conventional refinance process involves several steps, beginning with lender selection.

Homeowners should compare offers from multiple lenders, considering interest rates, terms, and closing costs, to secure the most advantageous financing package.

After lender selection, the formal application is submitted. This requires providing all necessary financial documentation, such as income verification, credit history, and asset statements.

The application moves into underwriting, where the lender reviews submitted information. Underwriters examine creditworthiness, income stability, assets, and property characteristics to determine loan approval. This review ensures the borrower meets conventional loan guidelines and the financial risk is acceptable.

During underwriting, a licensed appraiser conducts a property appraisal to confirm market value, important for the LTV ratio. A title search is also performed to ensure no undisclosed liens or ownership disputes, providing clear title. These assessments are essential to the lender’s final approval.

The final stage is closing, where all parties sign documents to finalize the new conventional loan. This includes the promissory note, outlining repayment terms, and the mortgage or deed of trust, securing the loan against the property. Funds are disbursed, and the previous VA loan is paid off, officially replacing it.

Important Considerations After Refinancing

Refinancing a VA loan to conventional introduces several financial and practical changes.

A primary difference involves private mortgage insurance (PMI) versus the VA funding fee. Conventional loans require PMI if the loan-to-value (LTV) ratio is above 80%, meaning less than 20% equity. PMI is a recurring monthly expense, ranging from $30 to $70 per month per $100,000 borrowed. In contrast, the VA funding fee is a one-time charge, which can be financed.

PMI on a conventional loan can be removed once the principal balance reaches 80% of the home’s original value, or automatically at 78% LTV, if the borrower is current on payments. Removal can be initiated by the borrower or occurs automatically.

Interest rates and loan terms for the new conventional loan depend on current market conditions, the borrower’s credit score, and the specific loan product. While VA loans offer competitive rates, a strong credit profile may lead to a lower rate or more flexible terms with a conventional product.

Escrow accounts may also change. Conventional loans require escrow accounts if the down payment is less than 20%, covering property taxes and homeowner’s insurance. While VA loans involve escrow, waiver requirements might differ.

A key benefit is the restoration of the veteran’s VA loan entitlement. This allows the veteran to use their VA loan benefit again for a future home purchase, potentially with no down payment on a new primary residence.

Closing costs apply to the new conventional refinance, similar to any mortgage transaction. These costs range from 2% to 6% of the loan amount and include origination, appraisal, and title services.