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 2.15 percent of the loan amount for regular military and 2.4 percent for 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.