How to Refinance a Conventional Mortgage into a VA Loan

It comes as a surprise to some, but one of the myriad benefits of VA loans is that qualified veterans with non-VA home mortgages can refinance into a VA loan and reap the program's benefits.

The VA Cash-Out refinance is the only way to make it happen.

Conventional to Cash-Out

The Cash-Out refinance is one of the VA's two refinance options. The other, the VA Streamline, is an interest rate reduction loan that's available only to those with VA-backed mortgages. By comparison, the Cash-Out refinance is much more involved. In fact, in many ways it mirrors the process for obtaining a VA purchase loan.

That means prospective borrowers will have to go through standard credit and underwriting procedures, including a look at credit scores, debt-to-income ratio, a home appraisal, income verification and other key steps. Make no mistake: This isn't a second mortgage or a home equity loan. A VA refinance replaces your current mortgage.

Guidelines and restrictions on loan-to-value ratio can vary by lender. Refinancing may result in higher finance charges over the life of the loan.

Funding Fee and Taking Cash

The VA requires a mandatory charge known as the VA Funding Fee on every loan it guarantees. This fee doesn't go to the lender; rather, it helps fund the VA home loan program and ensure that future generations of veterans can obtain home financing.

Veterans who want to refinance into a VA loan pay a higher Funding Fee than those who can pursue a Streamline. At present, the VA Funding Fee for a Cash-Out refinance is 2.30 percent of the loan amount for regular military, National Guard and Reserve members using the VA loan for the first time. Borrowers with a service-connected disability are exempt from paying the Funding Fee.

Depending on interest rates and closing costs, veterans in some cases might consider a home equity loan, although rates tend to be higher on these.

There's also a quirk when it comes to the Cash-Out for conventional borrowers: They don't actually have to take out any cash. It's just that this is the only option to jump into the VA loan program.