When You Should Refinance Your VA Loan to Conventional (And When Not To)

There’s no waiting period to refinance a VA loan to a conventional loan. Even so, there’s a lot you need to know before deciding for or against refinancing.

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When is refinancing a VA Loan to a conventional one a good idea?

Refinancing from a VA loan to a conventional one can be favorable in several scenarios.

Planning to keep your home as a rental property

If you plan to convert your current residence into a rental property and want to use a VA loan benefit again for a new primary residence, refinancing to a conventional loan becomes a strategic step.

Generally, having two VA loans simultaneously is not allowed unless you have sufficient remaining entitlement to qualify for a second loan.

Refinancing your current VA loan into a conventional loan might be necessary to regain eligibility for another VA loan.

Interest rate and term optimization

As mentioned above, if you can lower your interest rate or adjust the loan term, a conventional loan might offer better options and lead to considerable savings over time.

20%+ equity and avoiding VA funding fee

When your equity exceeds 20%, transitioning to a conventional loan eliminates the need to pay the VA funding fee, resulting in cost savings.

Changing financial needs

Your financial circumstances might evolve. If you’ve experienced a positive change in your financial stability, a conventional loan might provide more flexibility in repayment plans and loan terms.

Market trends and your long-term plan

Depending on the real estate market and your future plans, a conventional loan might better suit your objectives.

Consider consulting with a professional, knowledgeable financial advisor to assess the long-term impact of your decision.

Factors to consider for VA to conventional refinancing

Before refinancing your VA loan to a conventional loan, weighing several key factors that can significantly impact your financial situation is crucial.

Current interest rates

VA-backed loans often have competitive interest rates, and the Department of Veterans Affairs support goes a long way toward calming lenders’ nerves.

Compare those rates to the ones offered for conventional loans, taking into account potential fluctuations over time.

Closing costs and fees

Refinancing requires closing costs, including fees for appraisals, title searches, and other administrative expenses.

While VA loans typically have limitations on closing costs, conventional loan closing costs vary widely. Factor in these costs when assessing the overall financial benefit of refinancing.

What’s the break-even point? Determine how long it will take to recoup the costs through the reduced monthly payments.

Loan terms and repayment plans

Are you looking to pay off your mortgage sooner or reduce monthly payments? Refinancing to a conventional loan with a different term might work.

Additionally, conventional loans offer a more comprehensive array of repayment plans, giving you more flexibility to tailor your mortgage to your financial circumstances.

Impact on credit score and financial stability

Applying for a new loan triggers a hard inquiry on your credit report, which might cause a temporary dip in your score—but consistent and timely mortgage payments can positively impact your credit over time.

Ask yourself: Does refinancing provide you with more financial breathing room?

Conventional refinance vs. VA IRRRL (interest rate reduction refinance loan)

Comparing a conventional refinance to a VA IRRRL is vital, especially if you’re eligible for both options.

An IRRRL is designed to streamline the process of refinancing a VA loan and lower your monthly payment. The IRRRL requires less documentation, no appraisal, and limited credit checks.

However, a conventional refinance might offer distinct advantages even though it’s often more rigorous to qualify for.

For instance, a conventional refinance could be more suitable if you’re seeking to access your home’s equity, transition to a different loan term, or secure a lower interest rate.

Eligibility for refinancing

Refinancing your VA loan requires meeting specific eligibility criteria.

Credit score and financial health

Conventional loans generally demand a higher credit score than VA loans, as they involve greater risk for private lenders.

You typically need a 620 score for a conventional loan, but you may not receive a reasonable interest rate unless your score is 700 or higher.

Debt-to-income ratio

Lenders also assess your debt-to-income (DTI) ratio, which compares your monthly debt obligations to your income and indicates your ability to comfortably manage your financial responsibilities.

Whereas you might get a VA loan with a DTI as high as 50%, most conventional loans tap out at 45%.

Equity and loan-to-value ratio

To refinance into conventional, you typically need at least 3-5% equity in your home. You also need to roll closing costs into the refinance.

Income verification and employment history

A VA IRRRL requires no employment or income history, so you must document two years of solid employment or equivalent school to qualify for conventional.

Private mortgage insurance (PMI)

PMI is required for conventional loans with less than 20% down or less than 20% equity in the home at the time of the refinance.

VA loans require no mortgage insurance, so your cost may rise by refinancing into conventional.

How to refinance your VA loan to conventional

If you’ve decided to refinance your VA loan, the next step is to take action. Here’s what you need to do.

1. Evaluate your financial situation

Check your credit score, income, and debt levels. Conventional loans typically have stricter requirements, so a strong financial profile is crucial.

2. Determine your home’s equity

Lenders often require at least 20% equity in your home to avoid PMI. Refinancing might be a good opportunity if your home’s value has increased.

3. Shop around for lenders

Compare different lenders to find the best interest rates and terms. Be sure to clarify closing costs, fees, and any other lender expenses involved in refinancing.

4. Submit an application

Once you’ve chosen a lender, submit your application. You’ll need to provide documentation such as income verification, tax returns, and your current VA loan details.

5. Close the loan

After approval, you’ll move to closing. Pay attention to the terms, interest rate, and any fees involved.

Upon closing, your new lender will pay off your existing VA loan, and you’ll start making payments on your new conventional loan.

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Remember that each individual’s financial situation is unique.

We strongly encourage you to consult with a mortgage professional to gain personalized advice and guidance tailored to your specific needs.

When you decide what’s right, MyPerfectMortgage.com can match you with the perfect lender.