How to Refinance a VA Loan to a Conventional Loan

VA loans offer incredible benefits, but they may not always be a long-term fit for some homeowners.

If you’re thinking about switching to a conventional loan, the good news is that VA loans provide flexibility. While many homeowners explore refinancing with a VA loan to secure better terms, others may find that refinancing into a conventional loan is the better option.

Whether you want to remove VA occupancy requirements, free up your VA loan benefit or reduce your monthly payment, knowing the VA to conventional refinance process can help you decide.

Here’s what you need to know about switching from a VA loan to a conventional loan and whether it makes sense for you.

Remember that conventional loans have different eligibility requirements than VA loans, often with stricter credit and financial benchmarks. You’ll also want to consider closing costs and determine your breakeven point — the moment when your potential savings outweigh the upfront costs. Knowing your breakeven point ensures you’re making the right move for your long-term goals as a homeowner.

Eligibility Requirements to Refinance a VA Loan to Conventional

Refinancing into a conventional loan typically has stricter eligibility guidelines than a VA loan. While the core requirements remain the same, some lenders may have additional criteria.

To qualify, you’ll generally need to meet the following:

• A strong credit score: While the conventional credit score minimum is 620, you will typically need at least a 740 credit score to secure favorable terms. VA loans, which are government-backed mortgages, tend to be more flexible on credit requirements.
• Sufficient home equity: Unless you want to pay for private mortgage insurance as part of your new mortgage payments, you’ll need at least 20% equity in your home before refinancing into a conventional loan. You can calculate this by dividing your mortgage balance by your home’s value and multiplying that number by 100.
• Loan-to-value (LTV) requirements: These are generally higher on homes you intend to occupy and lower on properties you plan to use as investments or rentals. The absolute maximum LTV on a conventional loan is 97%.
• Manageable debt: Your maximum debt-to-income (DTI) ratio, which reflects how much of your income your debts take up, typically needs to be below 50% for a conventional loan. Sometimes lenders will require an even lower DTI, depending on your financial circumstances.
• VA loan waiting period: No matter what loan you’re refinancing into, you won’t be able to refinance a VA loan until at least 210 days have passed since closing on your VA loan (or you’ve made at least six on-time monthly payments, whichever is longer).
• Proof of steady income: There’s no exact income requirement, but the lender will need to see that you’ve had consistent income over the last two years — enough to cover your projected payment — and will continue to do so in the future.

Lender requirements can vary, so it's important to compare options and check specific qualifications before applying.

Advantages of Conventional Refinancing a VA Loan

Refinancing your VA loan into a conventional loan can open new doors for you. For one, you won’t have the upfront funding fee that VA loans come with. You’ll also remove the occupancy requirements of the VA loan, which means you can then use your property freely as a rental or for other investment purposes.

Refinancing also allows you the chance to remove co-borrowers or co-signers or add new ones, particularly non-related ones like friends or business partners.

Another big benefit is restoring your VA entitlement for a future home purchase if you want to use your VA loan benefit again. However, if a non-VA buyer assumes your VA loan, your entitlement may remain tied to the property until the loan is paid off. Refinancing into a conventional loan ensures your VA entitlement is fully restored.

Disadvantages of Conventional Refinancing a VA Loan

One of the biggest drawbacks of refinancing to a conventional loan is losing access to the VA Interest Rate Reduction Refinance Loan program (IRRRL), also known as the VA Streamline refinance.

This VA refinance program offers a simplified way to lower your interest rate with minimal paperwork, no appraisal in many cases and limited income verification. Once you switch to a conventional loan, you can no longer take advantage of this unique benefit.

Conventional loans can also be harder to qualify for. They typically require a higher credit score, a new appraisal, and significant home equity. You may also end up with a higher interest rate. VA loan rates are often some of the lowest on the market thanks to the government’s backing, which helps reduce lender risk.

Finally, you’ll owe closing costs when refinancing to a conventional loan. Freddie Mac estimates these to be around 3% to 6% of the loan amount, so about $12,000 to $24,000 on a $400,000 loan.

Steps to Refinance From VA to Conventional

Refinancing your VA loan to a conventional loan is fairly straightforward, but understanding each step can help you make the best financial decision.

1. Assess Your Financial Goals and Eligibility

First, determine why you want to refinance. Some common reasons for switching from a VA to a conventional loan include restoring your VA loan entitlement, removing a co-borrower after divorce, adding a non-spouse borrower, turning your home equity into cash or converting your home into a rental without being limited by VA occupancy rules.

For example, if you hope to turn your current home into a rental and use your VA benefit to purchase another property, refinancing into a conventional loan could free up your VA entitlement and remove occupancy restrictions. On the other hand, if your primary goal is simply to lower your interest rate, a VA IRRRL might be the easier and more cost-effective choice.

If a conventional refinance makes more sense for your situation, be sure you meet the qualifying requirements, including sufficient home equity, a solid credit score and stable income before moving forward.

2. Compare Lenders and Loan Terms

Next, compare a few different conventional loan lenders. Be sure to look at interest rates, terms, fees, closing costs and more. At this stage, you can ask lenders for a breakdown of estimated costs and rate quotes to get a clearer picture of what each option might look like.

Veterans United also finances conventional loans for Veterans and military families. Get a personalized quote today!

3. Get Preapproved for a Conventional Loan and Order an Appraisal

The next step is to get preapproved for your loan. Start by filling out the lender’s application and submitting financial documents like pay stubs, tax returns, W-2s, bank account statements and more. You must also agree to a credit check and provide information regarding your current VA loan.

Once this process is complete, your lender will order an appraisal to determine the current market value of your home. The conventional appraisal process is similar to the VA appraisal, but may have less stringent property requirements. A strong valuation of your house can often help secure better loan terms and may make your mortgage process easier.

4. Lock in Your Rate and Prepare for Closing

At this point, it’s time to lock in your interest rate with your preferred lender. This will protect you from any potential rate increases as they finish processing your loan.

You should also review the lender’s Closing Disclosure form, which you should get no later than three days before closing. It outlines the final terms of your loan, including your payment, closing costs, and other essential details.

5. Close the Loan and Transition to Your New Conventional Mortgage

Last but not least, it’s time to close on your loan. You’ll sign the official loan documents, finalize your refinance and pay closing costs.

After this point, you will stop making payments on your VA loan and start paying off your new conventional loan. Your lender will give you the payment details and due dates at closing.

Alternatives to Converting a VA Loan to Conventional

Refinancing your VA loan into a conventional loan isn’t your only option. With a VA loan, you can also opt for a VA IRRRL if achieving a lower interest rate or payment is your goal. If you want to cash in on some of your home equity, a VA Cash-Out refinance could be an option.

If you're considering a conventional mortgage so you can rent out your current home and buy a new one, you might have another option — at least if you’ve lived in your VA-financed home for over a year.

If you have enough entitlement, you could take out a second VA loan to purchase your new primary residence and turn the former VA-purchased home into a rental.

To determine if this move is right for you, you’ll need to compare the costs of the potential refinance, the costs of buying the new home with another loan and the costs that come with using your remaining VA loan entitlement.