FHA loans are often used by people who want to buy a home but don’t have a big down payment or a good credit score. But if your finances are better now, switching from an FHA to a conventional loan may save you money in the long run. Read to know more about how to refinance FHA to a conventional loan.
Can you refinance FHA into conventional loans?
Yes, you can switch from an FHA loan to a traditional loan via refinancing. If you have a home loan that the federal housing administration backs, it’s likely that your credit score wasn’t high enough to get a regular mortgage. This is normal for first-time buyers. You may be able to switch from an FHA loan to a regular loan if:
Your credit score is higher
For conventional financing, you’ll need a credit score of at least 620. You’ll usually get the best conventional interest rates if you have a credit score of 740 or higher.
You’ve paid off a lot of debt
Conventional lenders like it when your monthly debt is less than 50% of your income. If you’ve paid off your credit card debt or a high-balance auto loan, you may be able to get a conventional mortgage.
Your spouse has racked up extra debt
In the US, if you live in a “community property” state, your spouse’s debt counts against you even if they’re not on loan. No matter where you live, you can leave your spouse, and their debt off of a conventional loan refinance.
You don’t need a co-borrower anymore
If you are getting more income, you may be able to remove a cosigner to help you get an FHA loan.
When is a good time to refinance an FHA loan to a conventional loan
Simply because you can get a new loan does not mean you should refinance. Here are a few scenarios in which switching from an FHA to a conventional mortgage might make sense:
Your credit score has dramatically improved since you applied for your FHA loan
Assume you had a credit score of 600 when you took out your first loan. It’s now 700 after four years. That’s a significant difference that may allow you to qualify for a more affordable loan.
You plan to stay for a long time in the property
If you have no intentions to move in the near future and have a long time left on your present loan, a conventional loan refinance can be a wise solution. Nevertheless, refinancing may not be a good idea if you plan to relocate within the next few years because you may not have enough time to reach the break-even point when your savings outweigh the upfront closing expenses on a new loan.
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Pros of an FHA to conventional refinance
You can eliminate mortgage insurance premiums
No matter how much you put down on an FHA loan, you must pay an FHA – MIP. There are two payments: an upfront MIP payment you make at closing and an annual payment that is broken up and added to your monthly mortgage payment.
The amount you put down will determine how long you have to pay the MIP. If your down payment is not 20% or above, you must also pay insurance for a conventional loan. This is called PMI, and it is also a monthly payment. You don’t have to pay your PMI once you have enough equity in your home.
You can request your lender to cancel PMI when you have at least 20% equity based on the original payment plan, or you can wait until you meet the equity requirement, which is usually around 22%, and it will cancel itself.
In the case of an FHA loan and if you have 20% or above equity, you’ll still have to pay insurance. But you could eliminate that monthly fee if you switched from an FHA loan to a conventional loan.
You get lower interest rates
You get a new interest rate on your loan when you refinance it. When you refinance when rates are lower than when you first received the loan, the conventional loan interest rates are often a little higher than FHA rates. You’ll probably still get a lower interest rate and save money. Since you pay interest the whole time you have a loan, a lower interest rate could save you a lot of money.
You won’t have to pay lifetime FHA mortgage insurance
One downside of FHA financing with a small down payment is that you’ll have to pay FHA mortgage insurance every month for as long as the loan is in effect. With a conventional loan, you must pay PMI if you don’t have 20% equity.
But it goes away on its own once your loan balance has been paid down to 78% of the original price. You can also ask for PMI to be dropped if you’ve made extra payments that have brought your loan balance down to 80% of the original value of your home.
You can refinance earlier with an FHA streamline
Possibly you can switch from an FHA loan to a conventional loan whenever you want. You don’t have to wait to make a change as long as you qualify; it will save you money. To take advantage of how easy it is to get an FHA streamline loan, you will need to have made at least six payments on your current FHA loan.
You can use equity to avoid paying mortgage insurance again
With both an FHA cash-out refinance and a conventional cash-out refinance, you can borrow up to 80% of the value of your home. But a conventional cash-out loan doesn’t need mortgage insurance, unlike an FHA cash-out refinance loan.
You can get a higher loan amount than FHA loan limits allow
In the US, the conventional conforming loan limit for a single-family home is $647,200 and for FHA, it is $420,680.
Cons of an FHA to conventional refinance
You should pay closing costs
You can save money by refinancing from FHA to conventional because you can drop your insurance or receive a lower interest rate (or both). But you’ll have to pay closing costs. On average, closing costs are between 2% and 3% of the total loan amount.
You might still have to pay mortgage insurance
Still, those PMI payments will add up, so if you haven’t reached 80 percent yet, be sure to ask a lender how much your premiums would be.
You must repeat the loan approval process
You will also have to spend time on the process. You may already have a debt, but you’ll have to apply for and get approved for your new loan all over again. This means that your credit report will be checked, you will have to send in certain documents, and the home may need to be appraised again.
You may not qualify with a credit score that hasn’t improved
Conventional loans can’t be given to people with credit scores below 620.
You might have to pay a higher PMI
Unlike FHA mortgage insurance, your credit score affects the amount you pay for conventional PMI.
Your DTI ratio needs to be lower
If you have a lot of credit card debt or loans that are not for a mortgage, you may not be able to get a conventional loan.
You won’t have access to any streamline refinance options
With the FHA streamline, you can get a lower rate or better terms without having to prove your income or have your home appraised. On a conventional refinance, you might not have to pay for an appraisal, but you will have to show proof of your income.
You may not qualify with a recent foreclosure or bankruptcy
Getting a conventional loan must have been at least seven years since foreclosure and four years since bankruptcy. That’s much longer than the three-year waiting period after a foreclosure or the two-year period after bankruptcy that FHA loans require.
Alternatives to refinancing your FHA to a conventional loan
If you’ve served in the military and are eligible for a loan backed by the U.S. Department of Veterans Affairs, you may also be able to get a VA refinance (VA). You can switch out an FHA loan for a VA loan in either of the following ways.
VA regular refinance
With a VA refinance, you can borrow up to 100% of the value of your home. There is no need for mortgage insurance, but you may have to pay a VA funding fee if you aren’t exempt.
VA cash-out refinance
With a VA cash-out refinance, homeowners can borrow up to 90% of their home’s value. This is 10% more than FHA and conventional cash-out refinance loans allow.
Many homeowners can save money by switching from FHA to conventional loans. This is especially true if they are paying mortgage insurance premiums and see a chance to lower their interest rate. Still, you should always use a mortgage calculator to see if you’ll really save money. Think about the pros and cons, figure out how much it will cost, and look into all of your options so that you can make the best decision for your situation.
Can I refinance an FHA loan to a conventional loan?
Absolutely. You can switch from an FHA loan to a traditional loan. If you have a home loan that the federal housing administration backs. It’s likely that your credit score wasn’t high enough to get a regular mortgage. That’s what most new buyers do.
Is it worth refinancing from FHA to conventional?
If your credit has improved and your home’s value has gone up, refinancing from an FHA loan to a conventional loan is your best bet. By switching to a conventional loan, you may be able to shorten the length of your loan, get lower interest rates, and pay less each month.
How do I convert my FHA loan to a conventional loan?
You just can’t convert your FHA loan to a conventional loan. If you have adequate equity in the home, you may be able to refinance, which means you can get a new conventional loan and pay off the FHA loan. But the cost of doing that is about the same as getting a new mortgage—probably thousands of dollars. Any good lender in your area would happily give you the real figures for your situation.
How much equity do I need to refinance from FHA to conventional?
When you switch from FHA to conventional, you’ll have to pay for a new appraisal. Lenders need proof of how much your home is worth to make sure you have at least 3%–5% equity in it.
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