How to Refinance a Conventional Mortgage into a VA Loan
The VA provides a single option for refinancing from a conventional to VA loan and it’s simpler to use than you may think.
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.
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