Refinance FHA to Conventional
Many homeowners who have an FHA loan are looking to refinance. The question is whether they should refinance to another FHA loan or a conventional loan.
Refinancing from an FHA to conventional loan may be right for you depending upon your credit scores, equity in the home, and interest rate.
When to Refinance FHA to Conventional Loan
If you currently have an FHA loan, it does not mean you should refinance into another FHA loan. Meanwhile, the same can be said for conventional loans. In some instances, refinancing from a conventional loan to an FHA loan may be best for you.
You likely should refinance from an FHA loan to a conventional loan if one or more of the following is true:
- You have more than 20% equity in your home and you want to eliminate PMI
- The prevailing interest rate for a conventional loan is lower than an FHA loan
- You want to cash out more than what an FHA loan will allow
These are just three of the most common reasons who you may want to consider refinancing from an FHA loan to a conventional loan. It would be beneficial to speak with a loan officer so you can review your specific scenario to determine which option is best for you.
What are the Differences Between an FHA and Conventional Refinance
FHA and conventional loans both have their differences and benefits. If you are refinancing your home, it is important to understand those differences to determine which loan program is right for you.
PMI – FHA loans require mortgage insurance for the life of the loan with one exception, if you have at least 10% equity when the loan closes, then mortgage insurance can be cancelled after 11 years. Meanwhile, conventional loans only require mortgage insurance of you have less than 20% equity and can be cancelled much sooner. Read [FHA Mortgage Insurance]
Credit Scores – Conventional loans require credit scores of at least 620. Meanwhile, FHA guidelines permit credit scores as low as 500.
Debt to Income Ratio – Conventional loans limit your maximum DTI to 45%. This may limit the amount you can qualify for vs an FHA loan where the maximum DTI is 56.9%
Documentation – The FHA streamline refinance will allow you to qualify without providing all of the income documentation that conventional loans would require.
Interest Rates – The interest rates will be similar between FHA and conventional loans. In the end, it comes down to your credit scores and how much equity you have in the home when you refinance.
Closing Costs – When refinancing to a conventional loan, you will have the same closing costs what you would experience if you were purchasing a home. Meanwhile, with an FHA streamline refinance, the closing costs would likely be lower because there is no need for an appraisal.
FHA to Conventional Refinance Chart
|Debt to Income Ratio||Up to 56.9%||Up to 45%|
|PMI (Mortgage Insurance)||Yes||Sometimes|
|Cash Out Available||Yes||Yes|
Questions to Ask When Refinancing from FHA to Conventional
What is the goal when refinancing?
When refinancing, the goal is to improve or change your situation with your current mortgage. It could be that you are trying to lower your payment or lower your rate. Sometimes refinancing is done to cash out equity. Maybe you are looking to get out of an adjustable rate and convert to a more stable fixed rate. Another reason to refinance is to remove someone from the existing mortgage.
Is there a benefit to refinancing?
There must be a net tangible benefit for you to refinance. Lenders are actually legally required to make sure the refinance makes sense for you and not just a benefit for them. Therefore, achieving the benefits such as saving money, lower payments, cashing out are just some of the benefits that must be achieved when refinancing from an FHA to conventional loan.
How much Equity do you have in the home?
Ask yourself how much equity you have in the home right now. The equity is the difference between the current value of the home (how much you can sell it for now) and your current mortgage balance. Understanding this will help to determine whether you are able to refinance or whether an FHA or conventional refinance is right for you.
How much longer will you own the home?
Refinancing may only be beneficial for you if you plan to be in the home for a while. There are closing costs associated with refinancing which means the monthly payment savings need to offset those closing costs over time. If you are not planning to be in the home that much longer, then refinancing may not make sense.
Are your credit scores high enough to refinance?
Lenders will look at your credit scores when you refinance. If you are looking for a conventional refinance, the minimum score will be 620. For FHA you will need to have a score of at least 500. If you are getting an FHA streamline refinance, your credit scores will not be a factor in your approval but will be considered when determining your interest rate.
How long do you have to wait to refinance from FHA to conventional?
Most lenders will require at least some seasoning before you can refinance. Sometimes up to 6 months from when you closed on your prior mortgage.
How can I get id of PMI on my FHA loan without refinancing?
If you have a mortgage that was originated within the past few years, you are not able to get rid of PMI without refinancing your FHA loan unless you put at least 10% down when you purchased the home.