Can You Use a Veterans Affairs (VA) Cash-Out Refinance to Pay Off a Conventional Mortgage?

If you’re an eligible veteran, active-duty service member, or surviving spouse currently paying on a conventional mortgage, you might be able to refinance using a Veterans Affairs (VA) cash-out refinance. This could be true even if you didn’t use your VA home loan eligibility on your current mortgage. This option would replace a non-VA mortgage with a VA loan and, depending on your equity and qualifications, can put some of your home equity in your hands as cash at closing.

Remember, the VA home loan benefit is a lifetime benefit for eligible borrowers and may be used more than once. These refinances are one way some borrowers do that. Here’s how a refinance from conventional mortgage to VA cash-out works, who it’s designed for, and what you may want to review with a mortgage banker before you apply.

What Is a VA Cash-Out Refinance?

A VA cash-out refinance replaces your existing mortgage with a new, larger VA loan. If the new loan amount is greater than your current payoff amount, the difference is paid to you in cash at closing. The loan is fully underwritten, much like a VA purchase loan, and it typically requires a full appraisal along with a review of your income, assets, and credit.

Unlike a home equity loan or a home equity line of credit, which usually sit behind an existing mortgage, a VA cash-out refinance replaces the mortgage itself. The new VA loan pays off whatever loan is currently on the home, whether that loan was a VA loan, a Federal Housing Administration (FHA) loan, or a conventional mortgage.

Yes, a VA Cash-Out Refinance Can Replace a Conventional Mortgage

Your current loan doesn’t need to be a VA loan for this option to apply. If you have a conventional mortgage today and you meet the VA eligibility and private lender requirements, that conventional loan can be refinanced into a VA cash-out loan.

To make the switch, you’ll need a valid Certificate of Eligibility (COE) based on your service history, and the home must be your primary residence. A mortgage banker can help confirm your eligibility and pull your COE as part of the application.

Once the refinance closes, the new VA loan pays off your conventional mortgage in full. From there, the loan is part of the VA program, with VA guidelines applying going forward, even though it started out as a conventional mortgage.

Type I vs. Type II VA Cash-Out Refinances

VA cash-out refinances come in two forms, and it may help to know which one applies to your situation:

• Type I refinance. The new loan amount doesn’t exceed the payoff amount of the loan being refinanced. No equity is taken out in cash, but the loan itself is being converted, in this case from conventional financing to a VA loan.
• Type II refinance. The new loan amount exceeds the payoff amount of the loan being refinanced, meaning equity is taken out in cash at closing.

Both types allow a non-VA loan, including a conventional mortgage, to be refinanced into a VA loan. Which one fits your situation depends on your current loan balance, your home’s appraised value, and whether your goal is to receive cash or simply move into a VA loan program.

Why Homeowners Consider Switching From a Conventional Loan to a VA Cash-Out Refinance

Homeowners may consider a move like this for a handful of reasons, such as:

• Eligibility that hasn’t been used yet. It’s not uncommon that veterans and service members buy their first home with a conventional or FHA loan, then later learn they qualify for VA financing and want to put that eligibility to work.
• No monthly mortgage insurance. VA loans don’t require monthly private mortgage insurance, which conventional loans often require above certain loan-to-value levels.
• Access to home equity. When there’s enough equity in the home, cash-out proceeds can go toward things like consolidating higher-interest debt, funding a renovation, or covering other planned expenses.
• One loan instead of a second one. Because a cash-out refinance replaces the first mortgage rather than adding a second lien, some homeowners prefer it to a home equity loan or line of credit.

What to Review Before You Refinance From Conventional to VA Cash-Out

Switching loan types is a big decision. A mortgage banker can walk through all the factors with you before you apply, including aspects like:

• Funding fee. Most VA loans include a funding fee, which can generally be rolled into the loan amount if preferred. Some veterans, including those with a service-connected disability rating, may qualify for an exemption.
• Closing costs and underwriting. A cash-out refinance is a full refinance. Expect new closing costs, a full appraisal, and complete underwriting.
• A new loan balance. If you take cash out, your new loan balance will be higher than your current payoff amount, which affects both your monthly payment and the total interest paid over the life of the loan.
• Occupancy requirements. VA loans are intended for primary residences, so the home being refinanced needs to be the one you actually live in or intend to live in soon.

There are plenty of other factors to consider. So, be prepared to walk through your situation with a mortgage banker experienced in VA loans.

Key Takeaways

• A VA cash-out refinance can replace a conventional mortgage, not just an existing VA loan, as long as you meet VA eligibility requirements and qualify for financing from your lender.
• You’ll need a valid Certificate of Eligibility (COE), and the home must be your primary residence.
• VA loans don’t require monthly mortgage insurance, which can be a positive difference from a conventional loan for some borrowers.
• This is a full refinance. Expect an appraisal, complete underwriting, and new closing costs.
• A funding fee typically applies, though some veterans may qualify for an exemption.

Final Thoughts

Refinancing from a conventional mortgage into a VA cash-out loan gives eligible homeowners a way to take advantage of unused VA eligibility, potentially remove monthly mortgage insurance, and tap into built-up equity in the process.

Whether it fits your situation depends on your funding fee status, your financial profile, your home’s appraised value, and how the new payment fits your budget. A mortgage banker can walk through your current mortgage and these factors together, so you have the numbers in front of you before you decide.