What To Know About Refinancing An FHA Loan To A Conventional Loan

If you’re looking to lower your mortgage rate, change the term of your loan or convert the equity of your home into cash, refinancing is the way to do it. Mortgage refinancing involves taking on a new home loan under different terms. One common action is to refinance FHA to conventional loans.

Can You Refinance An FHA Loan To A Conventional Loan?

Borrowers can refinance an FHA loan to a conventional loan and enjoy its potential benefits if they meet a lender’s credit score, debt-to-income ratio and home equity requirements.

A Federal Housing Administration (FHA) loan offers benefits including the ability to qualify with a lower credit score than many mortgages, usually with a 3.5% down payment. However, with the drawback of potential lifetime mortgage insurance, refinancing for better terms when you qualify can make a ton of sense.

To refinance into a conventional loan, you must meet the following requirements:

• Qualifying credit score of 620 or better
• Debt-to-income ratio (DTI) of no more than 50%
• The income or other assets used to qualify must be reliable enough to make your monthly payment
• Depending on the goals of your refinance and the number of units in your home, the home equity requirement is 5% – 25%
• There may be certain circumstances in which you need to wait 6 months to a year prior to refinancing into a new loan

When To Consider Refinancing Your FHA Loan

A borrower should consider refinancing an FHA loan to a conventional one when they can lower their payment or interest rate or get favorable terms in taking cash out to finance a project or make another financial move.

Beyond potential differences in interest rates for similar loan terms, lifetime mortgage insurance is a major con of FHA loans. If you have a $300,000 loan amount and make the minimum down payment, you’re going to pay 0.55% of the loan amount per year. That comes out to $137.50 per month.

When looking at an FHA versus a conventional loan, this is one of the primary reasons to refinance. While mortgage insurance does exist on conventional loans, it’s often at a lower cost and can typically be removed altogether upon request once a client reaches 20% equity.

An Overview Of The Refinancing Process

When contemplating the process of refinancing an FHA loan to a conventional loan, here are the steps to take:

1. Determine your reasoning: You should decide whether refinancing is the best way to accomplish your goal. Then there’s the separate question of whether a conventional loan is the way to go compared to other loan options that may be available to you.
2. Prepare documentation: If you decide to move forward, lenders will want to see income and asset documentation. This includes things like account statements, W-2s, 1099s, tax returns and pay stubs.
3. Compare lenders: Comparing lenders will help you evaluate offers for both the upfront and lifetime cost of financing.
4. Submit an application: Submitting your application involves pulling your credit and sharing all required documentation. For your loan process to go smoothly, make sure that you promptly respond to any requests from your lender for additional information.
5. Get a home valuation: Because your lender can only let you borrow based on what the home is worth, you’ll have to have a professional valuation done on your property. Traditionally, this has been done with an appraisal, but in some cases, technology has made it possible to use other methods that are cheaper and faster.
6. Close on the new loan: This is when you officially sign the paperwork. In the case of a cash-out refinance, you’ll receive your funds a few days after closing.

Requirements To Refinance From An FHA To A Conventional Loan

The following is an at-a-glance view of refinancing requirements for FHA and conventional loans. Lenders may set their own requirements. For example, Rocket Mortgage^® requires a credit score of 580 regardless of the amount of equity you have for an FHA loan.

Pros And Cons Of Refinancing To A Conventional Loan From An FHA Loan

The following represent the advantages and disadvantages of refinancing to a conventional loan from an FHA loan.

Pros

• Lower monthly payments: As in any refinance, there is the possibility to lower your monthly payments if you get a lower rate or potentially choose a longer term. This could mean more budgetary breathing room.
• Turn your equity into cash: The equity in your home could be converted into dollars to use to do things like consolidate debt or make a home improvement.
• Eliminate mortgage insurance premium: You don’t have to pay mortgage insurance on conventional loans provided that you have at least 20% equity in your home. The elimination of FHA MIP could mean a savings of hundreds of dollars per month depending on your loan amount.
• Flexibility: FHA loans only allow for the financing of primary residences. By contrast, with a conventional loan, you can still refinance even if the house has been converted to a vacation home or investment property.

Cons

• Stricter requirements: Conventional loans have more stringent qualifications, including the need for a higher credit score and a lower DTI than is necessary to get an FHA loan.
• Closing costs: Any time you refinance, there are origination charges and other fees associated with the costs of getting a new loan. This is anywhere from 3% – 6% of the loan amount.

FAQs On Refinancing An FHA Loan To A Conventional Loan

Let’s answer several more questions you might be kicking around.

What’s the difference between an FHA loan and a conventional loan?

The main difference is that conventional loans have stricter qualifications than FHA loans. However, because of that, those who qualify for conventional home loans tend to be considered better risks, allowing them to receive more advantageous loan terms.

How soon can I refinance my FHA loan to a conventional loan?

There typically isn’t a required waiting period when refinancing from an FHA to a conventional loan. Timing will depend on several factors, including your financial situation, the terms of your FHA loan, market conditions and whether you meet conventional loan requirements. Certain refinance loans, like a cash-out refinance, may require a waiting period once loan conditions are met. But Fannie Mae and Freddie Mac usually don’t impose a waiting period for rate-and-term refinances.

How long will it take to refinance to a conventional loan?

Everyone’s loan process is different, so it’s not possible to answer this question in definite terms. A refinance process is typically shorter than that of a purchase. For a general guideline, 30 days is probably a good one. You can help clear roadblocks in your loan process by responding with urgency to your lender’s requests for information and documentation.

What are some alternatives to refinancing to a conventional loan?

If you decide going with a conventional loan isn’t right for you, you can look at other alternatives including the FHA Streamline refinance. The nice thing about this is that there is limited documentation required and typically no appraisal necessary. If you happen to be eligible for a VA loan, these offer some of the lowest rates available for any mortgage.

The Bottom Line

Refinancing from an FHA to conventional home loan involves passing more stringent tests, but the higher qualification standards often mean better loan terms when it comes to rates and costs. You can also ditch mortgage insurance with a conventional moan if you have 20% equity. Among the requirements are a 620 credit score and DTI of no more than 50%.

In addition to better rates and dropping mortgage insurance, conventional loans support a greater variety of property occupancy options. The downside is having to pay closing costs again.

If you’re ready to move forward with a refinance of your own, start an application today with our friends at Rocket Mortgage.