The VA provides a single option for refinancing from a conventional to VA loan and it’s simpler to use than you may think.
One of the myriad benefits of VA loans is that qualified Veterans with non-VA home mortgages can refinance into a VA loan using a VA Cash-Out refinance.
Conventional to VA 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.
How to Refinance into a VA Loan
During the VA Cash-Out refinance process, prospective borrowers will have to go through standard credit and underwriting procedures. This includes a look at credit scores, debt-to-income ratio, a home appraisal, income verification and other key steps.
In addition to meeting these lender requirements, Veterans will also need to ensure they meet the eligibility requirements for a VA loan. Your lender will want to take a look at your Certificate of Eligibility (COE), which only takes a few minutes to get with an experienced VA lender.
One other key factor of refinancing into a VA loan is you must intend to use the home as your primary residence. For example, if you have a vacation home that you want to pull equity out of for home improvements, the cash-out route may not be the right choice for you. This all comes down to the VA’s refinance occupancy requirements . The VA wants to ensure they are financing primary homes for Veterans, not investment ones.
A VA Cash-Out refinance isn't a second mortgage or a home equity loan, but actually replaces your current mortgage. Depending on the terms, refinancing may result in higher finance charges over the life of the loan.
» MORE: Start your VA cash-out refinance
How Much Does it Cost to Refinance into a VA Loan?
Closing costs and interest rates for Cash-Out refinances can vary by lender, but 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 VA Streamline. At present, the VA funding fee for a Cash-Out refinance is 2.15 percent of the loan amount for Veterans using the VA loan for the first time. Many Veterans choose to roll this fee into the total loan amount to avoid paying for it upfront. Borrowers with a service-connected disability are exempt from paying the funding fee altogether.
Do I Have to Take Cash Out?
There's a quirk when it comes to the VA Cash-Out for conventional borrowers: They don't actually have to take out any cash. It's just that a VA Cash-Out refinance is the only option to jump into the VA loan program.
Benefits of Refinancing to a VA Loan
There’s a whole slew of benefits that come with refinancing into a VA loan, such as:
- Potentially lower interest rate (dependent on market conditions)
- No longer paying for mortgage insurance
- Access to cash
Disadvantages of Refinancing to a VA Loan
As with anything, there are always cons to consider. Some of the potential disadvantages of using a VA Cash-Out refinance include:
- Potentially higher interest rate (dependent on market conditions)
- Taking out cash means you’ll owe more money in the long run
- Your lender may require you to have significant equity in the home
Note: At Veterans United, the current maximum loan-to-value ratio is 90%.
Is Refinancing to a VA Loan Worth It?
At the end of the day, each Veteran’s financial situation is unique and requires some analysis. The good news is you don’t have to make this decision on your own. Our team of loan specialists are available to help you decide whether or not refinancing into a VA loan is the right choice for you.
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