Can You Refinance a VA Loan Into a Conventional Loan?

A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs, provided by private lenders, designed for eligible veterans, active-duty service members, and some surviving spouses. These loans often feature benefits such as no down payment requirements and the absence of private mortgage insurance (PMI). In contrast, a conventional loan is a mortgage not insured or guaranteed by a government agency, originated by private lenders like banks or credit unions. It is possible to refinance an existing VA loan into a conventional loan, a decision often driven by evolving financial circumstances or homeowner goals.

Reasons for Refinancing from VA to Conventional

Homeowners with a VA loan might consider refinancing it into a conventional loan for several reasons.

One common motivation involves freeing up the VA entitlement for future use. By converting an existing VA loan to a conventional one, a veteran can restore a portion or all of their entitlement to apply it towards another property in the future, such as a new primary residence. This approach is particularly useful if the homeowner plans to convert their current residence into a rental property. VA loans typically have occupancy requirements, and refinancing to a conventional loan can offer greater flexibility if the property’s use changes.

Another reason is to remove a non-veteran co-borrower from the loan. While a non-veteran can be on a VA loan, refinancing to a conventional loan can simplify the ownership structure if circumstances change, such as a divorce or separation. If a borrower’s financial profile has significantly improved since obtaining the original VA loan, a conventional refinance might lead to more favorable interest rates or terms, due to a substantial increase in credit score or a reduction in overall debt. Finally, some homeowners may seek to access cash-out equity for purposes not easily met by VA cash-out options, as conventional loans can sometimes provide different parameters for accessing home equity.

Conventional Loan Refinance Requirements

Qualifying for a conventional loan refinance requires meeting specific criteria set by private lenders. Lenders evaluate a borrower’s financial stability through several metrics, including credit score, debt-to-income (DTI) ratio, and loan-to-value (LTV) ratio. Most conventional loans require a minimum credit score, often around 620, though a score of 740 or higher generally secures more favorable interest rates and terms. The debt-to-income ratio, which compares monthly debt payments to gross monthly income, is a significant factor; conventional lenders usually prefer a DTI ratio of 43% or lower.

The loan-to-value (LTV) ratio, the loan amount divided by the home’s appraised value, is another requirement. For a conventional refinance, an LTV of 80% or less is often needed to avoid private mortgage insurance (PMI). Stable income verification is required, with documentation such as two years of W-2 forms or 1099s, recent pay stubs, and two years of personal tax returns.

Self-employed individuals may need to provide additional documentation, such as two years of business tax returns or bank statements, to demonstrate consistent income. Lenders review bank statements to verify assets and ensure sufficient funds for closing costs and reserves. Property requirements for conventional financing include a current appraisal to determine the home’s market value and ensure it meets safety, soundness, and structural integrity standards.

The Refinance Application Process

The refinance application process begins with selecting a suitable lender. Borrowers should compare offers from multiple banks, credit unions, and mortgage companies to find competitive rates and terms for the new conventional loan. After choosing a lender, the next step involves submitting a complete application package, which includes all the financial documentation. This initial submission formally starts the lender’s review.

Following the application, the loan moves into the underwriting phase. Underwriters review all submitted documents, including credit reports, income statements, and asset verification, to assess the borrower’s financial risk and confirm compliance with lending guidelines. During this period, the lender orders a new appraisal of the property to ascertain its current market value, which is crucial for determining the loan-to-value ratio for the conventional refinance. This appraisal ensures the property’s value supports the new loan amount.

Upon successful completion of underwriting and appraisal, the loan receives approval, and the closing process is scheduled. Closing involves signing legal documents, including the new promissory note and mortgage or deed of trust, which formally replace the existing VA loan with the new conventional mortgage. Funds are then disbursed, paying off the previous loan and establishing the new one. The entire process, from application to funding, typically takes between 30 to 45 days, though this timeline can vary based on individual circumstances and lender efficiency.

Financial Considerations

Refinancing a VA loan into a conventional loan involves several financial considerations beyond just the interest rate. Closing costs are a significant expense, typically ranging from 2% to 6% of the new loan amount. These costs encompass various fees, including loan origination fees, appraisal fees, title insurance premiums, and government recording fees. Borrowers should review the Loan Estimate and Closing Disclosure documents to understand all associated charges.

Private Mortgage Insurance (PMI) is generally required for conventional loans when the loan-to-value (LTV) ratio exceeds 80%. Unlike VA loans, which do not require PMI, conventional loans use PMI to protect the lender from potential losses if a borrower defaults on a loan with a lower down payment or less equity. The cost of PMI varies but can range from 0.3% to 1.5% of the original loan amount annually, often paid as a monthly premium. PMI can be cancelled once the LTV drops to 80% or 78% of the original home value, either by borrower request or automatically by the lender.

Interest rates are a primary driver for refinancing decisions, with borrowers choosing between a fixed-rate mortgage, where the interest rate remains constant for the loan’s duration, or an adjustable-rate mortgage (ARM), where the rate may change after an initial fixed period. The choice impacts monthly payments and overall interest paid over the loan term. Most conventional loans require an escrow account for property taxes and homeowners insurance. A portion of each monthly mortgage payment is deposited into this account, and the lender uses these funds to pay property tax bills and insurance premiums when they become due.