How to Refinance from a Conventional Loan into a VA Loan - California

How to Refinance from a Conventional Loan into a VA Loan - California

VA refinance loans are usually used to stream-line from an original purchase loan that was VA into a new refinanced loan (called an IRRRL) to lower the interest rate.  

Today, though, we're looking at refinancing a conventional loan on a home in California, where property values have been down and recovered by about 25% in 2013-2014.  In such an example, a homeowner who used a conventional loan to buy can have watched the home become valued below the amount of the purchase money loan (on a positive note: the homeowner has not "lost" the down payment money at that moment because he/she has not sold the home; hanging onto the home until prices go up is one way to get that money recouped.  However, while the homeowner is waiting for values to return, the homeowner has watched interest rates fall, too, over the years, such that -- if he/she could refinance -- the payment on that first loan would be quite a bit lower than the current payment being made on the conventional loan.  One solution in this situation is, if the homeowner qualifies for the VA loan, to refinance into a VA loan.

CAUTION regarding Your Credit: Do not make changes to your credit accounts scenario without getting your loan officer's prior approval!  Paying off an account to zero can hurt a credit score; closing an account can hurt; getting a new loan can hurt.  Your credit might be better right now than if you make changes, so have it looked at BEFORE you start trying to implement "fixes."

Let's take an example: if a home in California was bought with a $400,000 first loan on the property, and originally was valued at $480,000, but now the value is in the $400,000 range, if that homeowner has VA eligibility, the homeowner could finance the whole $400,000 amount with a VA loan.  The VA loan is 100% financing* (although note that the VA charges a Funding Fee of 2.15% for the first time use, 3.3% for second/multiple use and -- for those with a VA disability rating -- ZERO Funding Fee if the VA approves a request to waive the Funding Fee; we process that paperwork for you as part of submitting the VA loan).  

We have even had clients who had used conventional financing -- and had a second lien and even a third lien on the property -- find that they could use the VA loan to finance 100% of the value that the VA appraisal found.  The VA loan would need to cover the Combined Loan to Value (CLTV), and not just the first loan.  If second or third loans secured by the home exist and make the CLTV higher than the appraised value, then we would be lookin at creative ways to pay off balances on the second or third liens, or to make the second or third lien an unsecured loan, for example by refinancing car loans or taking out a loan with a paid-off vehicle as collateral.  Again, this is case by case, and it depends on the official VA appraised value (see appraisal below), so have the situation looked at before you take action on changing anything about your credit/loan scenario.

How does a military servicemember (active or prior or retired) start the process?  You will talk with a loan officer who does VA loans (I do in California, would be happy to talk with you!), explain your situation, and have the loan officer do some homework on values of the property.  You'll see the comparable home listings that the VA appraiser is going to see, with their date of sale and sold prices.  A word of caution: if you get a VA appraisal done, the VA will consider that VA appraised value as "the" value of that particular home for VA loan purposes for six months, so you will want to look at the comps and see whether there is support for the VA appraiser to use in the value range you need, so you don't waste money on the appraisal.  

You will fill out an application, have credit pulled and the income and the property's valuation looked at initially, so you and the loan officer can review all aspects up front and see the likelihood of qualifying to refinance from a conventional loan into a VA loan, which these days has a lower interest rate along with the 100% financing aspect.*  Bottom line is, refinancing from a conventional loan into a VA loan should lower your payment for it to be a desirable strategy for you to use.  

Once you and the loan officer -- looking at the home's value, the loan(s) to be refinanced, your income/credit scenario, etc. -- believe that you and the home would qualify, and that the VA refinance would benefit you, you would do a full loan application.  The loan officer would submit that loan first through software to see if the software "thinks" that the loan would be approved.  If so, the loan officer submits the full loan package to the lender, where a live person called an Underwriter would review the documentation and make a final list of items ("conditions") that will be needed to finalize the loan.  The conditions will include an appraisal at the value you need, so the loan officer will have ordered the VA appraisal.  And the loan officer will give you a list of items that the Underwriter requires to approve the loan finally -- this will be specific to your particular situation (letters of explanation, statements for certain accounts, explanations of credit inquiries -- the list can be long or short and depends on each borrower's personal situation).

Using the list of conditions, your loan officer will gather all the items needed to complete the file.  You then wait for those items to be reviewed and the file deemed complete and ready for loan documents to be drawn up.  Then you sign the loan documents and have a 3 day right of rescission to wait for funding the loan (that waiting period is for you to have time to think about and go ahead with or decline the loan on the exact terms being offered).

Then the loan gets funded and the refinance is done.  

Did I not cover a topic you were researching in looking at refinancing a conventional loan into a VA loan in California?  Feel free to call or email me and ask: Lisa, 951-704-4559, lisa@sand2sea.us.

(*A note on 100% financing: current regulations about APR require that the APR be disclosed when percentage of loan and similar terms are mentioned.  On the $400,000 example above, the APR on today's interest rate of 3.75%, where you bring in cash to set up impounds, would include the VA Funding Fee of Zero for a servicemember with a disability rating, such that APR would be 4.89%)