Understanding VA and Conventional Loans

VA Loans

A VA loan is guaranteed by the U.S. Department of Veterans Affairs. Rather than lending money directly, the VA insures a portion of the loan, reducing the lender’s risk. Because of this guarantee, you can typically get:

• No Down Payment: You often can finance 100% of your home’s value if you qualify.
• No PMI: Unlike a conventional loan, a VA loan does not require private mortgage insurance, saving you money each month.
• Flexible Credit Requirements: VA loans usually have more lenient credit standards than conventional loans.
• Owner-Occupancy Requirement: You must occupy the home as your primary residence.

Conventional Loans

A conventional loan is not insured by a government agency. It follows guidelines set by private lenders or entities like Fannie Mae and Freddie Mac. Key features include:

• Down Payment: Typically 3–20%, depending on the program and your financial profile.
• PMI Requirements: If you have less than 20% equity, you’ll likely pay PMI.
• Stricter Credit Requirements: Lenders usually expect a higher credit score than VA loans.
• Flexible Property Use: You can often use conventional financing for primary residences, second homes, and investment properties without special occupancy rules.

“Many homeowners don’t realize that conventional loans can be just as competitive as VA loans if you have the right credit profile and sufficient equity,” notes Sarah Miles, a loan officer who frequently works with military families.

Why Refinance a VA Loan to Conventional?

Refinancing your VA loan to a conventional loan might make sense under several conditions:

• Freeing Up Your VA Entitlement: If you plan to keep your current home but also want to buy another primary residence with a VA loan, refinancing to a conventional loan can free up your VA entitlement. This allows you to use your VA benefits again without selling your existing property.

• Turning Your Home into a Rental: VA loans typically require you to live in the home. If you decide to convert the property into a rental, switching to a conventional mortgage can remove that owner-occupancy requirement.

• Securing Better Terms: Suppose interest rates drop significantly or your credit improves. In that case, you might qualify for a lower interest rate—or more favorable loan conditions—through a conventional refinance.

• Cash-Out Opportunities: You can do a cash-out refinance with both VA and conventional loans. However, some borrowers prefer conventional guidelines, especially if they have multiple mortgages or specific property investment plans.

Things to Consider Before Refinancing

Before you dive into refinancing your loan, weigh these important factors:

Credit Score

Conventional lenders often look for a score of 640 or higher. If your FICO score has climbed since you got your VA loan, you could be in a good position to snag a favorable rate.

Debt-to-Income (DTI) Ratio

Most lenders want your DTI to be below about 43%, though some allow up to 50%. Calculate your monthly debt payments, including your potential new mortgage, and compare the total to your gross monthly income.

Equity

If you have at least 20% equity, you can avoid PMI on a conventional loan. Less equity doesn’t disqualify you, but PMI can increase your monthly payment and diminish your savings.

Closing Costs

Refinancing involves expenses like appraisal fees, origination fees, and other closing costs. These often range from 2% to 5% of the loan amount. Make sure you’ll stay in the home long enough to offset these costs with monthly savings.

Future Plans

If you’re moving soon or unsure about how long you’ll keep the property, the short-term savings of a refinance might not justify the closing costs.

Step-by-Step Guide to Refinancing

Refinancing can seem complex, but the process becomes more manageable when broken into clear steps:

Assess Your Financial Health

Check your credit report for errors, calculate your DTI, and figure out how much cash you can set aside for closing costs. Getting your financial ducks in a row helps you find the best deal.

Compare Lenders

Talk to multiple banks, credit unions, and online mortgage brokers. Interest rates and closing costs can vary widely. A little shopping around can save you thousands. Fill out a few questions on our short online application and we will have VA lenders in our network reach out to get you pre-approved.

Get Pre-Approved

Getting pre-approved isn’t binding, but it gives you an idea of how much you might borrow and what interest rate you could expect. This step also makes it easier to compare lenders effectively.

Submit Your Application

Once you pick a lender, complete a formal application. You’ll provide documents like W-2s, pay stubs, tax returns if self-employed, and bank statements. The lender will order an appraisal to verify your home’s value.

Underwriting and Approval

The underwriting team examines your finances, credit, and the appraisal. They may request more documentation or clarifications. If everything checks out, you’ll receive a conditional approval or, in some cases, a final approval. In some cases an automatic approval is given and your application will have to go through manual underwriting. In manual underwriting, a human underwriter reviews each aspect of your financial situation in greater depth, verifying that you can handle the loan responsibly despite any factors that don’t fit the usual lending algorithm.

Closing

You’ll receive a Closing Disclosure at least three days before finalizing the loan. Review it for accuracy. At closing, sign the documents, pay any remaining closing costs, and finalize your new conventional mortgage.

Restore Your VA Entitlement (If Needed)

If your goal is to use another VA loan on a new primary residence, contact your regional VA loan center to restore your entitlement once your original VA loan is fully paid off.

Equity, PMI, and How They Affect Your Decision

When you refinance a VA loan to a conventional mortgage, the amount of equity you have influences whether you’ll need PMI. If your loan-to-value ratio (LTV) is over 80%, you’ll likely pay PMI, which can cost anywhere from 0.55% to 2.25% of the loan amount per year.

Keep a close eye on what your home is appraised for. Sometimes a higher-than-expected appraisal can push your equity above that 20% mark and help you avoid PMI altogether. If the home apprisal comes in lower than expected you can appeal it.

Potential Downsides to Watch Out For

Not all refinances provide a net benefit. Here are some pitfalls to consider:

• Closing Costs: You might pay several thousand dollars in fees. If you plan to move soon, you may not recoup these costs.
• Credit Score Requirements: If your credit score has dipped, you might not get a better interest rate than your existing VA loan.
• Loss of VA Benefits: By refinancing out of a VA loan, you lose access to potential perks like the VA Interest Rate Reduction Refinance Loan (IRRRL).
• PMI: If you have less than 20% equity, PMI costs can eat into your monthly savings.

Real-World Example

Imagine you bought a home in 2016 using a VA loan at 4.5% interest. Since then, you’ve built 25% equity and raised your credit score from 650 to 750. Current conventional rates hover around 3.5% for top-tier borrowers. Refinancing to a conventional mortgage could:

• Lower your monthly payment by hundreds of dollars
• Help you avoid PMI (because you have at least 20% equity)
• Eliminate further VA funding fees
• Free up your VA entitlement so you can use another VA loan in the future

Key Statistics and Expert Insights

• The Consumer Financial Protection Bureau (CFPB) notes, “Most VA loan borrowers opt for 30-year terms,” which might make refinancing attractive when market rates drop or your financial profile changes.
• Research from the Mortgage Bankers Association shows, “Borrowers with strong equity positions can save $100–$300 monthly by refinancing from a higher-rate mortgage to a lower-rate one.”
• Financial planners typically advise calculating your break-even point—divide total closing costs by the monthly savings—to decide if refinancing is truly beneficial.

The Bottom Line

Refinancing from a VA loan to a conventional loan isn’t a one-size-fits-all decision, but it can be a savvy move if you:

• Have built substantial equity (20% or more)
• Improved your credit score enough to secure a better interest rate
• Want to remove owner-occupancy restrictions or free up your VA entitlement

However, you should carefully weigh the closing costs, potential PMI payments, and the loss of exclusive VA benefits against any possible monthly savings. “Always consider your long-term plans and do a thorough cost-benefit analysis. By staying informed and shopping around, you can make the best choice for your financial future—and possibly unlock new opportunities through your hard-earned VA loan benefits.

Frequently Asked Questions

Can I refinance a VA loan to a conventional loan with a low credit score?

Yes, but most conventional lenders want at least a 640 score. If your score is below that, you could still qualify at some lenders, though you may face higher rates or tougher terms. Aim to boost your credit first, if possible, to unlock more favorable interest rates and better overall loan conditions.

Does refinancing from a VA loan to a conventional mortgage require a down payment?

Refinancing generally focuses on replacing your existing mortgage rather than making a new purchase. While no down payment is needed for a simple rate-term refinance, you must meet equity requirements. If you have under 20% equity, you could face private mortgage insurance (PMI), but you won’t need a new down payment to refinance.

Will I lose my VA entitlement after I refinance to a conventional loan?

Once your VA loan is paid off through the refinance, your entitlement can be restored in most cases. This means you’re free to use the VA benefit again for a future home purchase. Always confirm with the VA or your lender to ensure your entitlement is fully reinstated after the refinance process is complete.

How much equity do I need to avoid PMI when refinancing to a conventional loan?

You typically need at least 20% equity in your home to skip private mortgage insurance. A fresh appraisal determines your loan-to-value (LTV) ratio. If your home’s assessed value pushes your equity above that 20% mark, you can remove or avoid PMI altogether, potentially lowering your monthly payment and long-term costs.

What if my credit score has improved since I got my VA loan?

If your FICO score is significantly higher than when you first secured the VA loan, you might qualify for a better interest rate on a conventional refinance. Lenders often reserve their most competitive rates for borrowers with strong credit profiles. Improving your credit could make refinancing more cost-effective in both the short and long run.

Does my property need another appraisal when refinancing from VA to conventional?

Yes, most conventional lenders will require a new appraisal to confirm the home’s current market value. This helps determine whether you have sufficient equity to refinance and whether you’ll need to pay private mortgage insurance. A favorable appraisal can also improve your loan terms by pushing you above that key 20% equity threshold.

Is cash-out refinancing available if I switch from a VA loan to a conventional loan?

Absolutely. Conventional loans typically offer cash-out refinances, allowing you to borrow against your home’s equity. While VA cash-out refinances are also an option, some borrowers prefer the flexibility of conventional guidelines—especially if they’ve built substantial equity or plan to use the VA benefit on another property in the future.

How long does it take to refinance a VA loan into a conventional mortgage?

The timeline usually ranges from 30 to 45 days, depending on factors like appraisal scheduling, underwriting backlogs, and how quickly you submit required documentation. A straightforward refinance with a good credit score, low debt-to-income ratio, and sufficient equity might close faster, while unique financial situations could extend the process.