Refinancing VA loan to conventional loan?

Question

Just curious about what everyone's opinion is about refinancing a va loan to a traditional loan for the purpose of using the va loan on another property and living there, kind of similar to the idea of house hacking with a fha loan but only with a va loan?

Also I had a couple of questions about refinancing a loan from va to conventional

Do you need a down payment?

How long before you can typically refinance?

I'm unsure if it's even possible and would love anyone's input and feedback. Thank you

Jeff Copeland · Answer

It's definitely possible, and could be an good strategy in the right circumstances.

You will not need a down payment, per se, on the refinance. Instead, you'd be limited to a certain loan to value (LTV) limit...for a cash-out refi, likely 80% if you're an owner occupant, 75% if it's a rental property. (Or the greater of about 97% or the existing debt for a rate/term refi).

The limiting factor will be the amount of equity you have in the house, and that usually builds slower with a VA loan because you start out 100% (or more, with the VA funding fee) leveraged.

Here's an example:

• Let's say you bought your home for $100k with your VA loan, put nothing down, and rolled the 2.15% VA funding fee into your loan. You financed $102,150 on a house that was worth $100k. 
• Five years later (this timeframe is arbitrary...the amount of time is not important, the amount of equity is...though many lenders will not refinance sooner than six months from the previous mortgage), let's say you have paid down $5,000 in principal just by making your mortgage payments, so you now owe $97,150 on your house. In that five years, it's value has also appreciated to $135,000. You now have $37,850 in equity in your house ($135,000 minus the $97,150 you owe). 
• In this scenario, you could do a cash out refinance of 80% of $135,000, which is $108k. You could pay off your existing mortgage and have close to $10k in cash (before closing costs) to use for something else. And you'd free up your full VA loan benefit to use on a new primary home purchase with 100% financing.

As you can see, the amount of equity is what drives the feasibility of the refinance. In the scenario above, if your house had not appreciated to at least $122k or so, there wouldn't be any cash to take out. A rate term refinance might still be a possibility in that scenario.

In all cases, you'd have to look at the closing costs on the loan and determine whether they make it worthwhile.

There are other possibilities to explore as well...for example - in some cases, it's possible to use a second VA loan.  This article on military.com hits some of the key points.

Christopher Sarmiento · Answer

Thanks @Jeff Copeland! Your response to this question really helped me understand LTV!