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Veterans Affairs (VA) loans are often a great option for eligible veterans and service members. With features like no required down payment, no monthly private mortgage insurance (PMI) and competitive interest rates, it’s easy to understand why.
But even though a VA loan may be right when buying your home, it might not necessarily be the best option when it comes time to refinance. Things like a job relocation, a growing family, plans to turn a home into a rental property, or the need to restructure a loan all bring up new considerations for the ideal refinance loan. Depending on your situation, it might even be worth asking:
Can you refinance a VA loan into a conventional loan? And with the attractive qualities of the VA loan, does it ever make sense to do so?
The short answer is yes, it’s possible. But as with any major financing decision, it’s essential to weigh the pros and cons based on your unique situation. For some homeowners, it may align better with long-term goals. For others, refinancing with another VA loan may still be the better fit.
In this article, we’ll explain some of the things borrowers should consider before refinancing their VA loan into a conventional loan.
Can You Refinance a VA Loan to a Conventional Loan?
Yes, it is generally possible to refinance a VA loan into a conventional loan.
From a lending standpoint, this is considered a standard rate-and-term refinance or cash-out refinance under conventional loan guidelines, not VA guidelines. That means once you refinance, the loan is no longer insured by the U.S. Department of Veterans Affairs, and VA-specific rules, such as occupancy requirements, no longer apply.
It’s important to understand how this differs from other VA refinance options:
- A VA Interest Rate Reduction Refinance Loan (IRRRL) allows eligible borrowers to refinance an existing VA loan into a new VA loan, typically to lower the interest rate or payment.
- A VA cash-out refinance replaces an existing VA loan (or even a non-VA loan for eligible borrowers) with a new VA loan and may allow the borrower to access home equity.
Refinancing from a VA loan to a conventional loan is different. In this case, you are exiting the VA loan program entirely and replacing it with a conventional mortgage that follows Fannie Mae or Freddie Mac guidelines.
Why Would Someone Switch From a VA Loan to a Conventional Loan?
VA loans have unique qualities that appeal to many veteran borrowers, but they’re designed with specific guardrails in place, too. As a homeowner’s situation changes, those guardrails might sometimes feel limiting. That’s often when borrowers begin exploring whether refinancing a VA loan to a conventional loan better supports their next chapter.
Below are some, but not all, of the reasons a veteran might choose to make the switch. If you’re considering this switch for other reasons, be sure to talk to a mortgage professional about your options.
Removing VA Occupancy Requirements
VA loans are notable for, among other things, their occupancy requirements. They are intended for primary residences, meaning the borrower generally must intend to move into the home as their main residence within a reasonable time frame after closing.
While there are a few exceptions, this requirement can create challenges if your plans change. For example, you may be:
- Relocating for work or military orders
- Wanting to keep the home as a rental property
- Purchasing another primary residence elsewhere
Refinancing from a VA loan to a conventional loan can remove VA-specific occupancy restrictions, potentially giving you more control over how the property is used moving forward. However, be aware that some lenders could have their own occupancy requirements, too.
Adding a Co-Borrower Who Doesn’t Qualify Under VA Guidelines
VA loans allow co-borrowers, but the rules can be more restrictive than those for conventional loans, especially when the co-borrower is not a spouse or another eligible veteran.
In situations where a borrower wants to add a non-spouse partner, include a family member to help qualify, or restructure ownership or responsibility for the loan, a conventional refinance may be able to accommodate more options.
Conventional loans generally allow a wider range of co-borrower arrangements than VA loans, as long as income, credit and underwriting requirements are met.
Avoiding Future VA Funding Fees
VA loans typically require a VA funding fee, which helps keep the program running for future borrowers. Some veterans are exempt, but most are required to pay the fee when they take out a VA loan, a VA cash-out refinance, or a VA Interest Rate Reduction Refinance Loan (IRRRL). Refinancing into a conventional loan means the mortgage is no longer part of the VA loan program, so future VA funding fees would not apply for that specific loan.
When Refinancing From a VA Loan to a Conventional Loan Might Not Make Sense
Refinancing from a VA loan to a conventional loan isn’t always the right choice. In fact, there are plenty of cases where keeping a VA loan—or refinancing with a VA-specific program—makes more sense. Here are a few reasons why refinancing a VA loan to a conventional loan may not be the best option for some borrowers.
You’d Lose the No-PMI Feature
VA loans do not require monthly private mortgage insurance (PMI), even with little or no equity in the home. Conventional loans, on the other hand, typically require PMI when the loan-to-value ratio is above 80 percent. If you don’t yet have significant equity, refinancing into a conventional loan could result in a new monthly insurance cost, potentially increasing your overall payment.
Your Credit or Equity Doesn’t Meet Conventional Guidelines
Conventional loans generally have more stringent requirements for borrowers than VA loans when it comes to your overall financial profile. If your credit score has declined since you purchased your home, or if you haven’t built much equity yet, qualifying for a conventional refinance might be more difficult, or come with less favorable terms.
Lose Access to a VA IRRRL
Borrowers can only refinance existing VA loans into VA IRRRLs. If you were to refinance into a conventional loan, that loan would no longer be eligible to be refinanced using an IRRRL. This could potentially cost you an opportunity to lower your interest rate through the VA’s streamline IRRRL process.
Final Thoughts
Refinancing a VA loan to a conventional loan is possible, but whether it’s the right move depends entirely on your goals, your financial picture, and how you plan to use your home moving forward.
Taking the time to understand how refinancing from a VA loan to a conventional loan works, and when it does or doesn’t make sense, can help you move forward with more confidence, knowing your mortgage better aligns with your long-term plans.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
