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How to refinance from an FHA to conventional loan
You took out an FHA loan to buy your home because it was the best home loan option available at the time. Now, you may be wondering if you can get a better deal on your mortgage.
Good news: You can refinance your FHA mortgage to a conventional loan if you meet a mortgage lender’s requirements. While this isn’t the right move for everyone, it does have potential benefits that can save you money in the long run.
Dig deeper: FHA vs. conventional loan — What are the differences?
In this article:
Reasons to refinance from an FHA to a conventional loan
Many homeowners refinance their mortgages to secure a lower interest rate, potentially saving them thousands over the loan term. With the 30-year fixed mortgage rate much lower than a year or two ago, refinancing your FHA loan to its conventional counterpart could put money back in your pocket.
It isn’t all about mortgage rates, though. Tim Lucas, lead analyst at Mortgage Research Center, wrote via email: “... the biggest benefit is that a homeowner can eliminate their FHA mortgage insurance, which is typically required for the life of the loan.” He explained that if the owner has at least 20% equity in their home, they could refinance into a conventional loan without paying for mortgage insurance.
“Homeowners without 20% equity might benefit, too,” Lucas said. “Conventional mortgage insurance, called Private Mortgage Insurance or PMI, can be canceled once you reach about 22% equity, provided the loan is in good standing. A homeowner could refinance into conventional PMI knowing they could cancel it in a few years, which isn't an option with an FHA loan.”
Learn more: How to get rid of PMI and lower your monthly mortgage payments
How to refinance your FHA loan to a conventional loan
Refinancing your FHA loan to a conventional one will feel similar to taking out your original mortgage. Here are the steps to take to ensure a successful transaction:
Learn about refinancing
Understanding how mortgage refinancing works helps you be better prepared when speaking with lenders. Below are the basics you should know.
When you refinance your residence, you take out a new home loan to pay off your existing mortgage. There are two main types of refinancing: rate-and-term and cash-out.
With a rate-and-term refinance, you borrow enough money to repay your initial home loan. You’ll likely end up with a different repayment term or interest rate (or both).
With a cash-out refinance, you borrow more than your current mortgage balance and walk away with money in hand after closing. During this process, you tap into your home’s equity (your home’s value minus what you still owe on your mortgage). Your repayment term or interest rate may change with this refinance type too.
Dig deeper: How a mortgage refinance works and how to get started
Make a plan
Decide what your goal is for refinancing, then plan accordingly. A cash-out refinance can help you pay off other high-interest debt, remodel your residence, or cover another large expense. However, you’ll owe more money, which can negatively impact your budget or financial plans.
You should also consider how long you’ve had your current mortgage. Lucas said, “... if the [homeowner] purchased a home a year ago, they have 29 years left. If they refinance into a 30-year conventional loan, they will be paying off their home in a total of 31 years. A refinance wouldn't extend their loan payment dramatically.”
“But a homeowner who refinances into a new 30-year loan after three years essentially extends their loan to 33 years. They might consider refinancing into a 25-year term. They might save money monthly and reduce the number of years they will be making payments.”
Assess your financial situation
Review your finances to see if you meet the typical criteria for a conventional mortgage. While qualification requirements can vary between lenders, you can generally expect to need the following:
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620+ credit score
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Maximum 45% debt-to-income ratio (DTI), which is the amount you’re required to pay toward debt each month divided by your gross monthly income
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20%+ equity (to avoid private mortgage insurance and be able to take out cash)
If you can’t check off these boxes, it may be wise to improve your numbers before applying for your refinance. You should also ask your lender about its specific eligibility rules so you can prepare.
Find a lender and apply
Shop around for your refinance lender, as interest rates and fees can vary from company to company. Lucas recommended getting estimates from at least three mortgage lenders to ensure you get the best deal. Once you choose a lender, officially apply for the loan and submit the required documentation, like W2s, bank statements, and paystubs.
Read more: The best mortgage refinance lenders
Wait out the underwriting process
Be patient — the underwriting process could take several weeks to complete. During that time, you’ll need to have your home appraised and may need to submit additional documentation per your lender’s request.
Finalize your new loan
If your application gets approved, you’ll get a clear to close. On closing day, you'll sign the official paperwork to finalize the transaction and pay closing costs.
Refinance closing costs typically come to 3% to 6% of your mortgage principal. It’s possible to roll these expenses into your principal balance so you don’t have to pay it all at once on closing day — but Lucas warned against this. Adding closing costs to your balance means you will pay interest on this money over the years.
Learn more: How does a no-closing-cost refinance work, and should you get one?
Pros and cons of refinancing into a conventional loan
Refinancing your FHA loan to a conventional mortgage has potential perks and pitfalls. These are the main pros and cons to consider:
Pros
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Eliminate mortgage insurance now or in the future
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Take cash out if you have sufficient equity (although it’s worth noting that an FHA cash-out refinance allows you to do this without switching)
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Reduce interest paid (if rates have dropped or you refinance to a shorter term)
Cons
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Pay closing costs
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Go through the application and underwriting process again
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Increase interest paid (if rates have jumped or you refinance to a longer term)
Dig deeper: The pros and cons of refinancing your mortgage
Should you refinance from an FHA to a conventional loan?
You may want to refinance your FHA loan to a conventional mortgage if you can secure a lower interest rate or quickly shed your mortgage insurance obligation. Lucas pointed out that short-term savings isn’t the only reason to refinance, though.
“Homeowners should consider how long they plan to have the home and loan. If they don't break even on loan costs within about two years, a homeowner might consider waiting.
For example, if closing costs equal $3,000 and you save $300 per month, that's a 10-month breakeven point. If it costs $8,000 for the same monthly savings, a refinance is likely not worth it,” continued Lucas.
If you plan to move in the next year or two, refinancing could ultimately cost you more than it will save you.
Learn more: How to get the lowest mortgage rate possible
Refi from FHA to conventional FAQs
Is an FHA Streamline Refinance a good alternative to a conventional loan?
An FHA Streamline Refinance may be a worthwhile alternative to a conventional loan if you’ll benefit financially. For example, you might get a lower interest rate, choose a shorter loan term, or switch from an adjustable-rate mortgage to a fixed-rate one. Getting an FHA Streamline Refinance is also an easier process than refinancing into a conventional loan because you don’t need a property appraisal and might not even need a credit check. However, you will still need to pay mortgage insurance premiums (MIPs), likely for the duration of the debt.
How soon can I refinance an FHA loan to a conventional loan?
Unlike an FHA Streamline Refinance, which requires you to wait at least 210 days after closing to refinance your FHA loan, you can switch to a conventional loan at any time if you qualify to do so. However, it may not make sense to change your home loan soon after obtaining it, as it’s unlikely your finances or the real estate market will have drastically changed.
What’s the difference between FHA and conventional mortgage loans?
The primary difference between an FHA mortgage and a conventional mortgage is that an FHA loan is insured by a government agency (the Federal Housing Administration), while a conventional mortgage is not. Generally, qualifying for an FHA home loan is easier than a conventional mortgage.
This article was edited by Laura Grace Tarpley.
