Can I Refinance An FHA to A Conventional Loan?

If you have an FHA loan, now may be a great time to refinance to a conventional loan. Mortgage rates are as low as they’ve ever been. But there’s no guarantee they’ll stay this low.

They could soon creep upward. Consider a refi FHA to conventional if you’re ready to lower your interest rate and get rid of mortgage insurance.

Can You Refi FHA to Conventional Loan?

Many FHA borrowers can refinance an FHA loan to a conventional loan. But the catch is, you’ll have to meet some requirements to make it happen. FHA loans have relaxed underwriting guidelines. The credit score requirements are lower, and the debt-to-income ratio isn’t as strict.

Conventional Loans Have Tighter Guidelines You Must Meet

Conventional loans require:

• Minimum 640 to 660 credit score
• Stable income and employment for two years
• 20% equity (or private mortgage insurance for equity below 20%)

If you have a good credit history, have some equity in the home, and want to lower your interest rate or change loan terms, you could be on your way to a conventional loan.

Mortgage Insurance in a Refi FHA to Conventional Loan

The biggest question borrowers have is- Can you refinance an FHA loan to eliminate PMI?

PMI, or private mortgage insurance, is required with conventional loans if you don’t yet have 20% equity in the home. But FHA loans require mortgage insurance as long as you have an FHA loan. It doesn’t matter how much equity you’ve built up. The good news is you can drop mortgage insurance by refinancing FHA to conventional.

The bad news? You may pay PMI for a while unless you have at least 20% equity in the home. If you have an FHA loan now, you may not have made a large down payment when buying your home. Getting to 20% equity may take many years. It’s not a deal-breaker, though. Keep in mind that for lenders to cancel PMI, you’ll need a stable payment history. If you miss payments or can’t keep up with your current loan, they may not remove PMI.

Benefits of Refinancing FHA to Conventional

Refinancing to a conventional loan from an FHA mortgage can have several benefits:

• Get rid of mortgage insurance, saving you money over the long term
• Access higher loan limits than FHA loans, which can help if you want a cash-out refinance down the road
• PMI rates may be lower, which can lower your monthly payment amount

The Cons of Refi from FHA to Conventional

It doesn’t always make sense to refinance from an FHA loan. Here are a few downsides to consider:

• Stricter guidelines making it harder for some borrowers to qualify
• Closing costs to refinance into another loan, which may take away from the savings

Is it Worth it to Refinance My FHA Mortgage?

Refinancing your FHA mortgage will cost you money. You may have to pay for an appraisal and other fees as part of the closing costs. So, when does it make sense to refinance your FHA loan to a conventional mortgage? It makes sense to refi your FHA to conventional if:

• You've improved your credit score and can qualify for the best rates and terms with a conventional loan.
• You have enough equity to get rid of mortgage insurance.
• You want to take advantage of falling interest rates.

Even if you check all the boxes above, how do you know if it makes sense to refinance your FHA mortgage? It comes down to your break-even point. Remember that refinancing will cost you money, and the money you save should outweigh the cost.

Take a look at how much money you could save if you refinance. Then calculate how many months of savings will take to cover the closing costs. That’s your break-even point.

For example, if you pay $5,000 in closing costs to refinance and save $150 a month on the new loan, it would take you 33 months – or almost three years – to break even on the closing costs.

Will you still be in the home in three years? If so, refinancing makes sense since you’ll enjoy the savings. But the savings might not make sense if you move before or shortly after the three-year mark.

Too Many Requirements? When to Consider a FHA Streamline

Do the refi to conventional requirements have your head spinning? Maybe you haven’t improved your credit yet or don’t meet the other requirements for a conventional loan. At Good News Lending, we have other options to help. 

The FHA streamline refinance and the FHA cash-out refinance are great alternatives to a conventional loan. However, the FHA streamline refinance is the easiest way to refinance. 

All you need is proof you’ve made your last six payments on time. You don't have to verify your income, credit score, or assets. But an FHA cash-out refinance may be the answer to tap into your home’s equity.

We help borrowers with this type of loan when they want to renovate homes, pay off credit card debt, or make another large purchase. 

How To Get the Best Deal on a Refi FHA to Conventional

If you’re looking to get the best refi FHA to a conventional deal, let the professionals at Good News Lending help. We’ll walk you through your options, helping you decide which loan makes the most sense.

We don’t just fit borrowers into the loan that suits their credit score and debt ratio. Instead, we look at the big picture with you. We consider your full financial plan and how the new mortgage could affect you not only today but 15 or 30 years in the future too.