VA loans, backed by the U.S. Department of Veteran Affairs, make homeownership affordable for members of the armed forces and veterans. If you have a VA loan, you’re already familiar with the perks these loans offer, including 100% financing, competitive rates and no private mortgage insurance (PMI) requirement.
Despite these benefits, the time may come when a refinance makes sense. But you’re not limited to VA-specific options. You can also swap out your VA mortgage for a conventional home loan. Here’s what you need to know before moving forward.
How Does Refinancing from VA Loan to Conventional Loan Work?
When you choose to refinance, you trade your current VA loan for a conventional loan, typically with different terms. The new lender pays off your old mortgage, and you resume repayment per the terms of the loan agreement on the conventional loan.
How Long After a VA Loan Can You Refinance?
You must make six monthly payments on your VA loan or wait 210 days to move forward with a conventional loan refinance, whichever is greater. This same rule applies to VA loan refinances or if you choose to refinance with a different VA mortgage.
Reasons Why You Might Refinance VA Loan to Conventional
A few instances could warrant a refinance from a VA to a conventional mortgage product.
Improved Loan Terms
If your credit score has improved since you took out your original, you may qualify for a better rate by refinancing. The same applies if you know you have “excellent” credit, as the most competitive interest rates are reserved for borrowers who fall into this category. Still, it’s worth checking out the current rates with VA loans, as they tend to be lower than what you’ll find with conventional loan products.
Lower Monthly Payment
A lower interest could mean more affordable monthly mortgage payments, particularly if you opt not to reset your loan term. But if you do, the payments will likely be even lower, although you could pay more in borrowing costs since the lender gets more time to collect from you.
More flexibility
If you want to convert your primary residence into a rental property, you can refinance to a conventional loan. This is a commonly used strategy for homeowners who want to hold an investment property to generate rental income.
Ineligible for an IRRRL
The VA Interest Rate Reduction Refinance Loan is a popular option for many borrowers to secure a lower interest rate. However, a conventional refinance could be the next best option if you’re ineligible for the loan product because you have several mortgages or for some other reason.
Key Considerations when Refinancing a VA Loan to Conventional
Refinancing Costs
You’ll be on the hook for closing costs when refinancing your mortgage – typically between 2% and 5% of the loan amount. These costs can include loan origination fees along with fees for the appraisal, title search and other services. If you want a lower interest rate, you’ll also need to pay points directly to the lender. Some lenders let you roll closing costs into the loan, or you may have access to a “no-closing-cost mortgage” in exchange for a higher interest rate.
Interest Rates
A primary draw to refinance is the possibility of a lower interest rate. If you have excellent credit, you could get a lower interest rate by refinancing to a conventional loan. Be mindful that interest rates fluctuate over time, so it’s worth following trends on the market to identify trends.
Your Home Equity
If you’re considering a conventional cash-out refinance, you’ll need a sizable amount of home equity to qualify for a new loan. Most lenders require you to have at least 20% in equity to qualify for a loan. The more, the better, though, as having a small amount of equity could limit the amount of cash you can pull out.
What are the Requirements for Refinancing a VA Loan to a Conventional Loan?
If you meet the waiting period referenced above, you could be eligible for a refinance, assuming the following guidelines are also met:
- Credit score: You’ll need a credit score of at least 620 to qualify for a conventional loan – the higher, the better.
- Debt-to-income (DTI) ratio: Your DTI should not exceed 50%, although 43% or lower is preferred and gives you the best approval odds.
- Income: You should also have a consistent stream of verifiable income. Lenders will confirm this information by requesting income documentation, like recent pay stubs, tax returns, bank statements and W2s.
- Down payment: Conventional mortgages require a minimum down payment of 3%.
- Private mortgage insurance (PMI): This coverage is also required if you put less than 20% down.
- Loan amount: The loan amount must not exceed the conforming loan limits set forth by the Federal Housing Finance Agency (FHFA). This figure is $766,550 (or up to $1,149,825 in high-cost areas).
How to Refinance a VA Loan to Conventional Loan
Evaluation of Current Mortgage and Your Financial Situation
Assess your finances to determine if it makes sense to refinance. It’s equally important to determine why you want to refinance. Also, take note of your current interest rate, monthly payment amount and the remaining balance on your VA loan. You’ll need these figures when comparing loan quotes.
Checking Credit Score and Eligibility
Take a look at your credit score to ensure it’s up to par. As previously mentioned, you’ll typically need a credit score of 620 or higher to qualify for a conventional loan. A higher score means more competitive terms, so it’s worth improving your credit health before applying.
Also, compute your DTI to confirm it is below the lender’s maximum threshold. It’s 43% for most lenders, but you could get approved if it’s slightly higher if there are other compensating factors.
Comparison Shopping for Lenders
The next step is to shop around for a viable lender. Inquire about each lender’s eligibility guidelines and compare rates, fees and terms. Remember to factor in closing costs, which can cost several thousands of dollars.
Loan Application and Approval
Once you’ve found a lender that meets your needs, formally apply for a conventional loan. You’ll need to provide financial documentation, including pay stubs, tax returns and bank statements, to prove you have enough assets and income to afford the loan.
Underwriting and Appraisal
After you’ve submitted your loan application, the lender will review your financial information and credit score to determine whether you qualify for a conventional loan. The lender will also order an appraisal to determine the value of your home. Your loan will be approved if you meet the eligibility requirements and your home appraises at or above the project value.
Closing
At closing, you’ll sign the loan documents and pay closing costs if you opt not to roll them into your loan. Be sure to address any questions or concerns you may have before signing the loan agreement to avoid any surprises later on down the line.
Conclusion: Making the Decision to Refinance from VA to Conventional
There are several reasons for refinancing from a VA loan to a conventional loan. You want to weigh the benefits and drawbacks, shop around, and run the numbers to confirm that it makes financial sense. Understanding eligibility guidelines before formally applying is equally important so you’ll know what to expect. Most importantly, prepare your finances and confirm your credit rating is up to par before moving forward to give yourself the best chance of getting a good deal when refinancing to a conventional loan.
Frequently Asked Questions about Refinancing VA Loan to Conventional
Not necessarily. If you plan to relocate soon, the costs associated with refinancing could exceed the benefits of getting a cheaper mortgage or more competitive terms. Furthermore, refinancing to a conventional loan may not be the best option if you have a service-related disability, as you’ll lose the unique benefits available to disabled veterans.
Yes, it’s possible to revert back to a VA loan. However, there may be a waiting period before you can make the switch.
