Did you know that if you qualify, you could refinance any existing mortgage — yes, we’re talking conventional — into a VA loan? Quite a few borrowers aren’t aware of that fact, and at Aligned Mortgage, we want to show you all of the benefits that come from refinancing your FHA or conventional mortgage into a VA loan.
Why would you switch? Well, maybe you want to lower your current mortgage rate to save money on that interest you’re paying the lender. Another reason might be to change from an adjustable-rate mortgage to a fixed rate. Perhaps you simply want to change the term of the loan by shortening the life of the mortgage, and you’re willing to make a higher monthly payment to decrease your overall interest payments. On the other hand, you can pivot from a short-term to a long-term loan where you’ll end up making a smaller monthly mortgage payment for an extended period.
There are plenty of personal and economic reasons to convert a conventional or FHA loan into one that is VA-backed. If you’re eligible, you’ll find that VA home loans offer powerful benefits beyond those of traditional mortgage loans. If you have any doubts, take a look:
- Although borrowers must show that they have sufficient income to repay their VA loans, for the most part, approval guidelines are less strenuous for VA loans when compared with conventional mortgage loans.
- VA loans don’t require a down payment, unlike another government-backed home loan, the FHA, which requires at least 3.5 percent down.
- VA home loans don’t require private mortgage insurance, or PMI, which can typically add up to another 1 percent on your mortgage amount annually until you reach at least 20 percent equity.
- VA loans typically come with a funding fee paid once upfront, but you can fold the fee into the closing costs. However, if you have a service-related disability and meet specific requirements, or if you’re the surviving spouse of a veteran who died in service or from a disability resulting from military service, you’re exempt from paying the funding fee.
- VA home loan rates are super competitive, and you might snap up an interest rate that’s much lower than what you’d qualify for with a conventional loan.
- VA loans offer relaxed credit and income requirements that make it easier to qualify.
- VA loans limit closing costs that keep the upfront expenses involved in buying or refinancing with a VA home loan at a minimum.
- VA loans also come with no prepayment penalties. If you like and you’re able, go ahead and pay off your home loan early without worrying about any added fees.
How to switch from a conventional loan to a VA loan
The VA Cash-Out refinance package allows borrowers to switch from a traditional or FHA loan to a VA-backed home loan. Remember that the VA’s other refinance option, the streamline, also known as the IRRRL (Interest Rate Reduction Refinance), is not in play here because that transaction is only available for a VA to VA refinance.
You can use the cash-out refinance to go from a conventional or FHA loan to a VA loan. Note that the cash-out refinance is not a home equity loan or a type of second mortgage. With a VA cash-out refinance, you are literally replacing your current loan with a completely new loan, which pretty much mimics the process of applying for a VA purchase loan. This means that you’ll have to endure the traditional credit and underwriting processes. Your credit scores, income verification, and debt-to-income ratio will all get a thorough examination, and you’ll need a home appraisal. The process takes about the same time to complete as a conventional loan, about 30 to 45 days. The additional advantage of the cash-out loan is that it gives you the option to take money out from the equity in your home. For instance, you can refinance the entire loan amount, and at closing, cash out between 90 to 100 percent of the equity. You can spend the money on anything you want, from consolidating debt, remodeling your kitchen, or paying for education.
Closing costs to refinance from a conventional loan to a VA-backed loan
You can’t ignore closing costs when you’re considering refinancing a loan. They can mount up and add a few thousand dollars to your final loan amount. Each VA refinance package has closing costs associated with it. At Aligned Mortgage, our experienced team will make sure that you understand the costs and benefits of the refi transaction so that you’ll know precisely what you’re getting into when you begin the refinance process.
Although there is typically no down payment required and no private mortgage insurance (PMI) associated with a VA refinance, there are other fees you might encounter at closing.
- Funding fees: The VA funding fee is part of every VA program and refinance loan. The fee doesn’t go to the lender; instead, it’s sent directly to the Department of Veterans Affairs to offset any losses and to keep the loan guaranty program going for the next generation of veterans and active-military homebuyers. As a percentage of the loan value, funding fees currently range from 2.3 percent of the amount borrowed, and the funding fee goes up to 3.6 percent for borrowers who have used a VA loan program in the past. One way to reduce funding fees is to put down at least 5 percent at closing. You can also roll the funding fee into your loan. The VA waives the funding fee for military members compensated for a service-related disability and those who have received a Purple Heart.
Other closing costs: Typically, closing costs for a VA refinance are similar to a conventional loan refinance. They might include:
- VA appraisal fee: To determine that the loan doesn’t exceed the property’s value, the lender will require an appraisal of the home.
- Title fees: These fees go toward a title search on the property to ensure that the borrower has a claim as the home’s owner.
- Origination fees: Simply put, these are fees the lender charges as compensation for their services. They include gathering your documents, getting information from the IRS and your employers, verifying that your information is accurate, and ensuring that your application meets their criteria.
- Credit reports: One of the lender’s methods to determine whether a borrower qualifies for a VA loan is to pull a credit report that provides information that includes the number of debt borrowers carry and if they pay their bills on time.
Our loan officers at Aligned Mortgage can help you become familiar with the process of converting from a conventional loan to a VA-backed loan. They will gladly go over with you how much it will cost to close a loan and any other questions you might have. We know that it’s in your best interest to become familiar with the refi process, and we’re here to help you do just that. Please feel free to contact us here. If you want to see whether you’re qualified, then please go ahead and apply here online.