How To Refinance FHA To Conventional Loan
Lauren Nowacki5-minute read
September 23, 2022
Homeowners who refinance from a Federal Housing Administration (FHA) loan to a conventional home loan may reap financial benefits – like lowering their monthly payment and saving money. But what’s the difference between the two loans and is a refinance from FHA to conventional the best option for you? Keep reading to find out.
Can You Refinance FHA Loans Into Conventional Loans?
Refinancing from an FHA loan to a conventional loan can be a good choice for borrowers who have improved their credit and grown equity in their home. You may be able to shorten your loan term, take advantage of lower interest rates and enjoy lower monthly payments by refinancing to a conventional loan.
The differences between FHA and conventional loans often make the FHA loan a better option for many borrowers with their first home. FHA loans are backed by the government and may have fewer restrictive requirements (like lower credit score prerequisites) because they’re insured by the FHA. Though these loans may be easier to qualify for, many opt to refinance FHA to conventional once they have the loan. That’s because they may be able to get rid of their mortgage insurance premium (MIP) and lower their monthly payment or take money out from the equity in their home. In the next section, we’ll explore these benefits further.
Before we do that, here’s what you need to refinance to a conventional mortgage based on minimum Rocket Mortgage® requirements:
- 620 minimum credit score
- 43% maximum debt-to-income ratio (DTI)
- Proof of income
- Homeowners insurance verification
- Appraisal of home or the equivalent of one to determine its value
Pros Of An FHA-To-Conventional Refinance
Refinancing from an FHA to a conventional loan has its financial benefits. Here’s how it can help you save.
Drop Mortgage Insurance Premiums
When you get an FHA loan, you must pay an FHA mortgage insurance premium (MIP) – no matter how much you put down. There are two payments: an upfront MIP that you pay at closing and an annual payment that’s broken down and added to your monthly mortgage payment.
How long you pay the MIP will depend on the amount you put down.
- If your down payment is at least 10%, you’ll pay the MIP for 11 years.
- If your down payment is less than 10%, you’ll pay the MIP for the life of the loan.
With a conventional loan, you must also pay insurance if your down payment is less than 20%. This is called private mortgage insurance (PMI) and it’s also a monthly payment. Unlike an FHA loan, you can get rid of your PMI once you have enough equity in the home. You can request that your servicer remove PMI once you have at least 20% equity based on the original payment schedule or wait for it to automatically cancel once you meet the servicer’s equity requirement – typically around 22%.
If you have an FHA loan and have at least 20% equity, you’ll still need to pay insurance until the 11 years are up or for the rest of your loan term. But, if you refinance FHA to conventional, you could get rid of that monthly fee.
Lower Interest Rates
When you refinance your loan, you get a new interest rate. While conventional loan interest rates are typically a bit higher than FHA rates, if you refinance when rates are lower than when you first got the loan, you’ll likely still get a lower interest rate and save money. And since you pay interest throughout the life of your loan, a lower interest rate could save you thousands of dollars.
Here’s an example:
Let’s say you have a 30-year FHA mortgage for $300,000 at 3%. After 2 years, you’ll have paid $13,300 in total interest. If you keep your original FHA loan for the full term (30 years), you’ll pay $155,332 in total interest.
Now, let’s say instead of keeping the original loan for 30 years, you refinance the loan after two years. You refinance into a new, 30-year conventional mortgage at an interest rate of 2.75%. Since you paid on the original loan for 2 years, your loan balance is now $290,533. If you kept the new conventional loan for 30 years, you would pay $136,454 in total interest over the life of the new loan.
Now, add the 2 years you paid interest on the original loan, and you’ll pay a total of $149,754 in total interest. With just the original FHA loan at a 3% interest rate, you still would’ve paid more. By refinancing to the lower interest rate, you save $5,578 in total interest paid over the life of the loan.
Cons Of An FHA-To-Conventional Refinance
Refinancing a mortgage is a big financial decision. While it can affect your finances in a positive way, you should know that it also requires spending some money and time.
While a refinance from FHA to conventional can save you money by allowing you to drop your insurance or get a lower interest rate (or both), you’ll have to pay closing costs to refinance your loan. On average, closing costs are about 2% – 3% of the loan balance. For example, if your loan balance is $200,000, you can expect your closing costs to be around $4,000 – $12,000.
Since there are costs associated with refinancing, you’ll want to ask yourself, is the cost to do so worth the savings?
Repeat Loan Approval Process
Another thing a refinance will cost you is time. You may already have a loan, but you’ll need to go through the application and loan approval process all over again for your new loan. That includes having your credit pulled, submitting certain documents and potentially having another appraisal performed on the home. A few documents you’ll likely need to provide include:
- Recent pay stubs
- Copy of your homeowners insurance policy
- W-2s, tax returns, 1099s
- New lender’s title insurance policy
Alternatives To Refinancing Your FHA Loan To A Conventional Loan
If all of that seems like too much – or you’re unable to refinance to a conventional loan – an FHA Streamline Refinance could be a good alternative option. An FHA Streamline Refinance can allow you to enjoy some of the benefits of refinancing without changing to a conventional loan. You may still be able to lower your interest rate and reduce your monthly payment, but you won’t be able to get rid of mortgage insurance and you’ll still need to pay closing costs. It’s worth noting that mortgage insurance costs are lower on an FHA Streamline.
This type of refinance comes with another benefit: a speedier, more simplified process. That’s because it typically requires less documentation and may not require an appraisal.
While the lender may consider fewer credit factors with an FHA Streamline, it still performs a credit check. If you don’t meet minimum credit score requirements for an FHA Streamline or to refinance FHA to conventional, you may want to consider learning how to refinance with bad credit.
The Bottom Line
Refinancing your FHA loan to a conventional loan can be done and has a few benefits, including, dropping your mortgage insurance, lowering your interest rate and saving you money.
While these perks can help you reach your financial goals, you’ll also need to consider that there are closing costs you’ll need to pay, so make sure it’s worth it in the long run. Remember, too, that there are alternative options, like an FHA Streamline, which allows you to enjoy some of the benefits of refinancing, while staying in an FHA loan.
Explore your options and find out the best loan option for you by talking to a mortgage lender, who can give you all the details about refinancing with Rocket Mortgage®. You can also give us a call at (833) 326-6018.
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