How To Refinance FHA To Conventional Loan

Homeowners who refinance from a Federal Housing Administration (FHA) loan to a conventional home loan may reap financial benefits – like lowering their monthly payments 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?

Let’s take a look at what goes into refinancing from an FHA loan to a conventional loan, the benefits of doing so and important details to consider when changing loan types.

Refinancing from an FHA loan to a conventional loan can be a good choice for borrowers who've improved their credit and built 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 more relaxed requirements (like lower credit score prerequisites) because they’re insured by the FHA.

Though these loans may be easier to qualify for, many homeowners opt to refinance FHA to conventional once they have the loan. That’s often 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.

Here’s what you need in order to refinance to a conventional mortgage based on Rocket Mortgage^® requirements:

• 620 minimum credit score
• 50% maximum debt-to-income ratio (DTI)
• Proof of income
• Homeowners insurance verification
• Appraisal of home or the equivalent of one to determine home value

Refinancing from an FHA to a conventional loan has its financial benefits. Here’s how it can help you save.

Drop Your Mortgage Insurance Premium (MIP)

When you get an FHA loan, you must pay an FHA MIP – no matter how much money 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.

If your home loan was finalized on or after June 3, 2013, how long you pay the MIP will depend on the amount you put down.

• If your down payment was at least 10%, you’ll pay the MIP for 11 years.
• If your down payment was less than 10%, you’ll pay the MIP for the life of the loan.

Mortgage Insurance Premium Vs. Private Mortgage Insurance

With a conventional loan, you must also pay mortgage insurance if your down payment is less than 20%. This is called private mortgage insurance (PMI), and it’s also a monthly payment. But unlike an FHA loan finalized on or after June 3, 2013, you can get rid of your PMI when 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 you can wait for it to automatically cancel once you meet the servicer’s equity requirement – typically around 22%.

If you have an FHA loan, you’ll likely need to pay MIP for 11 years – or until your loan term ends – regardless of your equity. But if you refinance FHA to conventional, you could potentially get rid of that monthly fee.

Lower Interest Rates

When you refinance your home loan, you get a new interest rate. While conventional loan interest rates are typically a bit higher than FHA rates, you could still get a lower interest rate and save money if you refinance when rates are lower than when you first took out the loan. And since you pay interest throughout the life of your loan, a lower interest rate could potentially save you thousands of dollars.

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.

Closing Costs

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 as well. On average, closing costs are about 3% – 6% of the loan balance. For example, if your loan balance is $200,000, you can expect your closing costs to be around $6,000 – $12,000.

Since there are costs associated with refinancing, you’ll want to ask yourself, "Is the cost to do so worth the savings?" To be sure refinancing is worth it, you’ll want to calculate your break-even point, which is the point at which your refinance makes sense financially, saving you money rather than costing you more than you’re saving.

Repeat Loan Approval Process

Another way a refinance can cost you is in time. You may already have a home loan, but you’ll need to go through the application and loan approval process all over again for your new loan. This includes having your credit pulled, submitting certain documents and potentially getting another home appraisal. Some documentation you’ll likely need to provide includes:

• Recent pay stubs
• A copy of your homeowners insurance policy
• W-2s, tax returns, 1099s
• A new lender’s title insurance policy

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 also 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, a credit check is still required. If you don’t meet minimum credit score requirements for refinancing to an FHA Streamline or a conventional mortgage, you may want to consider learning how to refinance with bad credit.

Do you still have questions about refinancing from an FHA to a conventional loan? Here are some answers to the most frequently asked questions surrounding this topic.

Can I refinance out of an FHA loan?

Yes, you can refinance out of an FHA loan as long as you qualify for a conventional loan with a credit score of 620 or higher and have 5% – 25% equity in your home. If you have 20% equity, you may also be able to remove your mortgage insurance and lower your monthly payment in the process.

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

Typically, you can refinance to a conventional loan when:

• At least 12 months have passed since the closing date of the previous mortgage, for a cash-out conventional loan.
• At least one client is on title as an owner before your loan application date, for a rate and term conventional loan.
  

Once you meet these requirements, it mainly comes down to qualifying for a conventional loan.

When should I refinance my FHA loan to a conventional loan?

Refinancing to a conventional loan can be a good idea if your credit score has improved, interest rates are down or you plan to live in the house long enough to recoup your closing costs. Otherwise, you may not see some of the benefits discussed above.

Refinancing your FHA loan to a conventional loan can be done and has a few potential benefits, including dropping your mortgage insurance, lowering your interest rate and saving money. While these perks can help you reach your financial goals, you’ll also need to consider the closing costs, so make sure it’s worth it in the long run. Alternative options, like an FHA Streamline, can also allow you to enjoy the benefits of refinancing while staying with an FHA loan.

Get a better look at your refinancing options and start your initial mortgage approval today with Rocket Mortgage.