Should You Refinance a VA Loan to a Conventional One?

Should you refinance a VA loan to a conventional one? There are no rules to stop you. But, in well over 90% of cases, we wouldn’t recommend it.

However, sometimes it can be a smart idea. Here’s a deeper look into the circumstances and needs you may have that could make such a refi attractive.

Why You Normally Shouldn’t Refinance a VA Loan to a Conventional One

Refinancing a VA loan to a conventional one may not be possible or may not benefit you for the following reasons.

• You may incur mortgage insurance if you have less than 20% equity in the home (aka an 80% loan-to-value)
• Conventional loans require higher credit scores than VA, so you may not qualify
• Your conventional loan rate may be much higher than your VA rate
• Your income or asset profile may have been good enough for a VA loan but not conventional

When You Might Refinance a VA Loan to Conventional

One common reason you might refinance a VA loan to a conventional one is that you can’t do what you want with the loan.

To Re-Use Your VA Entitlement

You may want to use your VA entitlement on another home. In this case, you may need to refi to a conventional loan to restore your entitlement. 

You’re entitled to the full benefits of a VA loan in one of only three circumstances:

1. You’ve never had a VA loan before
2. You’ve had one before but paid it back completely and sold the home.
3. You’ve refinanced out of a VA loan and requested a one-time restoration of your entitlement
4. Someone with their own VA entitlement has legally “assumed” (taken over) your VA loan with the VA’s consent. That clears your debt to the VA

It’s not impossible to get a new VA loan on a different home while you still have an existing VA loan balance. But you might face a down payment requirement and a loan limit that caps your borrowing potential. Everything depends on how much of your entitlement remains intact.

Your up-to-date certificate of entitlement (COE) tells you what the VA reckons you’re currently entitled to. You can request one from the VA here. 

But once you’ve paid off your existing VA loan, you can apply for a “restoration of entitlement.” And, all being well (it’s not automatic), your full entitlement should be restored and your COE amended. 

You’re a Civilian, Getting a Divorce, and Want to Keep the House

You can assume the VA loan if you’re a civilian and keeping the home after a divorce. However, you may want or need to refinance to a conventional loan. If you assume the loan, the veteran’s VA loan entitlement remains tied to the house – they can’t use a VA loan again until the home is paid off or refinanced.

If the departing veteran wants their entitlement restored, the remaining civilian would need to refinance to conventional or another loan type.

You’ve Rented Out Your Home

Imagine this scenario. Your existing home has a VA loan but you’ve rented it out. You’re getting a good income, the tenants are no trouble, and you want to keep the arrangement going.

But you’ve used up too much of your entitlement to get a second VA loan for the new home you want to live in. What do you do?

Well, you could refinance the VA loan on your rental property to a conventional mortgage. That pays back the VA 100% of your mortgage balance. So, you can ask the VA for a “one-time restoration.”

That should provide you with an updated COE that lets you buy your next home with a full entitlement. Just don’t rent that one out and try the same trick again. The VA is determined not to subsidize entrepreneurs building property empires, and it’s called a “one-time restoration” for a reason. It only works once.

Cash-Out Refinance

You might need a cash-out refinance and have insufficient eligibility on your COE to qualify for the amount you want. That could be a good reason to refinance a VA loan to a conventional one. 

But, before you do so, the VA suggests you, “Apply for restoration of entitlement for cash-out refinance purposes only.”

Once your entitlement is partly restored, you may find that you can borrow all you need with a VA cash-out refinance. 

But get quotes for a conventional cash-out refi, too. It’s always worth checking to make sure you’re getting the best possible deal. 

Cash-out refinances aren’t always the best option, though. Most homeowners should consider them when they can drop their mortgage rate while getting cash out or get a significant amount of cash at lower rates than are available elsewhere. Consider home equity loans or home equity lines of credit (HELOCs) as well. With these, you pay a higher interest rate only on your new borrowing, not on the entire new mortgage balance.

VA Rehab Loan

Suppose you have a VA renovation loan. One of those is intended to let you buy a fixer-upper and restore and update it with a single loan. 

What happens if you uncover some horror after you start work and aren’t able to meet the comprehensive and exacting standards of the VA’s Minimum Property Requirements?

One way forward may be to refinance a VA loan to a conventional one. Conventional lenders will still need your home to be of sellable quality. However, they tend not to have the nit-picking standards laid down by the VA.

Refinance a VA Loan to a Conventional: Should You?

Most people never want to refinance a VA loan to a conventional one. Why would you? VA loans are typically less costly and easier to get.
But, in rare circumstances, you might be better off with such a refi. Still, before you commit, research your options carefully, especially possible workarounds offered by the VA. And talk things through with a reputable VA lender.