Refinancing an FHA Loan to a Conventional Loan

What Goes into Refinancing an FHA Loan to Conventional?

Homeowners have many ways they can save money, and for some, a mortgage refinance is the first and biggest step. For people with an FHA loan, one question that often pops up is whether it’s possible to refinance an FHA loan to a conventional loan. The answer is yes—but there’s a lot to consider.

Let’s walk through what this mortgage adjustment could look like for you.

Can You Refinance an FHA into a Conventional Loan?

Yes, you can refinance your FHA into a conventional loan. This type of refinance can save money by getting rid of your FHA mortgage insurance premiums (more on these in a minute). If you refinance and get a lower rate, you’ll also see some additional savings. However, you’ll need to meet the conventional loan’s eligibility requirements.

Qualifications To Refi FHA Loan to Conventional

Every loan has requirements you must meet to qualify. When you refi from an FHA loan to a conventional mortgage, here are some factors that can impact your approval and terms:

• Your credit score: Mortgage lenders use your credit score as one deciding approval factor and a way to determine your interest rate. The minimum credit score can vary from lender to lender on some loans, but it’s generally a minimum requirement of 620 (or slightly higher) for a conventional loan.
• Your financials: Lenders also consider how steady your income is. Proof that you have a regular income that has been consistent for at least two years is generally required for conventional loans. Lenders follow these guidelines to make sure you’ll be comfortably able to make your monthly mortgage payments.
• The equity in your home: Having more equity in your home means you won’t need private mortgage insurance (PMI) on a conventional mortgage. To avoid adding PMI onto your new loan, you’ll need at least 20% equity in your home. More home equity also helps you qualify for slightly lower mortgage rates.
• Your debt-to-income ratio (DTI): Your DTI shows how much of your money goes to paying your monthly debts. Conventional loans allow lenders to have a range of qualifying DTI ratios for mortgages, with 36% and below allowing for the lowest mortgage rates.

Do You Have Enough Home Equity to Stop Paying Mortgage Insurance?

A good first step is to estimate the current value of your home’s equity and turn it into a percentage. To do this, check the current value of your home with one of the various online tools available. Keep in mind: These values are just estimates.

You’ll need your current mortgage balance, which you can find on your monthly statement, plus the balance of any other home loans or property liens you might have, such as a home equity loan. Then, the math is simple. Check out this sample calculation:

In this example, the homeowner has $75,000 in home equity. To convert this into a percentage, divide $75,000 by $300,000, which is the current value of the home ($75,000 ÷ $300,000 = 0.25 or 25%.) Because the value of the home equity in this example is more than 20%, the homeowner would likely qualify to refinance into a conventional loan and stop paying mortgage insurance.

Benefits of Switching from an FHA to a Conventional Loan

Refinancing an FHA loan to a conventional loan offers a few ways you can save money. First, you may be able to get a lower interest rate, which can save you money on your monthly mortgage payment and the reduction in interest over the life of the loan.

Another way is through cutting mortgage insurance:

• You won’t have to pay a new upfront mortgage insurance premium (UFMIP). Most FHA homeowners will need to pay a new upfront mortgage insurance premium equal to 1.75% of the loan amount when they refinance with an FHA loan. Conventional loans don’t have upfront mortgage insurance fees. As a result, you can avoid this cost if you choose a conventional loan rather than an FHA loan for your refinance. On a $300,000 mortgage, that’s a savings of $5,250.
• You may no longer have to make monthly mortgage insurance payments. Current FHA homeowners need to pay an annual mortgage insurance premium (MIP)—broken into 12 monthly payments—for at least 11 years, regardless of the value of their home’s equity. Private mortgage insurance (PMI) is only required for conventional loan refinances if your home’s equity is less than 20%.

As a result, refinancing to a conventional loan might help you avoid mortgage insurance costs you would have to pay if you refinanced to an FHA loan.

How to Refinance FHA Loans to Conventional

If you determine that a conventional loan could be a good option for you, here’s what the refi process could look like:

1. Confirm your eligibility: Review your credit score, DTI, current equity, and other factors to determine if you’re eligible and prepared to refinance your existing loan and make payments on a new one.
2. Get a home appraisal: Lenders often ask for a professional appraisal to confirm your home’s current value and how much equity can be used for the new conventional loan.
3. Approved for a new loan: If eligible, you’ll go through underwriting for a conventional loan, which is when the lender will review your financial information and home appraisal.
4. Close on the loan: Once approved, you can close on your new conventional loan. You’ll stop making payments on the FHA loan, and all new payments will go toward the refinanced amount.

It can take 30–60 days (or longer) to refinance your FHA loan. The timing of your appraisal, how long your lender takes to review your application, and your ability to provide everything needed upfront are just some factors that can influence this timeline.

How Long Do You Have to Wait to Refinance from FHA to Conventional?

You’ll need to wait at least six months after your FHA loan closes before you can refinance it into a conventional loan. Keep in mind that some lenders may make you wait longer. After the waiting period, you’ll be able to apply if you meet all the conventional loan requirements.

Alternatives To Refinancing Your FHA to a Conventional

You do have other options beyond refinancing from an FHA to a conventional loan. A lot of it depends on your goals for the refinance. Here are some of those options:

• FHA streamlined refinance: You’ll still have an FHA loan, but you may be able to lower your interest rate and have lower monthly payments. A new appraisal or credit check typically aren’t necessary with an FHA streamlined refinance.
• FHA cash out refinance: You may qualify to get an FHA cash out refinance, which lets you borrow against your home’s equity. The money you get from your equity is tax-free and has no restrictions on how you use it.
• Home equity loan or line of credit: If you need access to cash to consolidate debt or make improvements to your home, you can tap into your home equity. With a home equity loan or home equity line of credit (HELOC), you’re able to borrow against your equity to cover large expenses.

There may be other options, too. One of our mortgage specialists can help you find the right one for your situation.

Final Thoughts: Should You Refi to a Conventional Loan?

Refinancing your FHA loan to a conventional loan can be a good strategy to save money. Eliminating the MIP from your loan or lowering your interest rate can make a huge difference in your monthly payments.

But it’s important to know your refinancing goals and connect with a mortgage lender to see if you qualify. If you’re ready, get started on your mortgage refinance application with Freedom Mortgage today, and we’ll help you find the best solution to meet your goals and save money.