Are you looking to refinance your FHA loan? Switching to a conventional loan could be ideal if you qualify for more competitive terms or if you want to get rid of mortgage insurance. But is it the right move for you?
It depends on several factors, starting with your reason for wanting to refinance and if the numbers make sense. Here are some tips to help you move forward with confidence, choose the right lender and position your finances to get the best deal when refinancing from an FHA to a conventional loan.
Can an FHA Loan Be Refinanced to Conventional?
It’s possible to refinance into a conventional loan if you have an FHA loan. In fact, doing so could mean sizable cost savings over the life of the loan. But you must meet certain guidelines to have the best shot at getting approved.
Why Consider a Refinance from FHA to Conventional?
Before discussing the specifics of refinancing to a conventional loan and what you’ll need to move forward, here’s why this financial move could make sense.
Remove Mortgage Insurance
All FHA mortgages require you to pay Mortgage Insurance Premium (MIP) at the start of the loan. And if you put down 10%, you’ll only pay MIP for 11 years. Otherwise, you’re stuck with it for the life of the loan. But if you have at least 20% equity in your home, you won’t need to carry private mortgage insurance (PMI) on your home and could save hundreds monthly on your mortgage payments.
Lower Monthly Payments
There are two primary ways to lower your monthly mortgage payments by refinancing. You can do so if you qualify for a lower interest rate than you currently have and choose not to reset the loan term. Or you can extend the repayment period to get more affordable payments. Keep in mind that doing the latter could mean steeper borrowing costs over the life of the loan.
Potential for Improved Loan Terms
If your credit score has improved since you took out your current loan, you could be eligible for a conventional loan with better terms. This could mean a lower interest rate, a shorter loan term, or even cash-out options if you have a sufficient amount of home equity.
Tips to Refinance an FHA To a Conventional Loan
Keep these suggestions in mind as you take the next steps toward refinancing your FHA loan in a conventional mortgage:
- Assess your financial situation. Review your credit profile and debt load to confirm you satisfy the credit and DTI guidelines. Also, confirm you have at least 3 to 5% in home equity, as it’s generally the minimum amount required to qualify for a conventional loan refinance.
- Understand refinance options. You can refinance into a fixed-rate or adjustable-rate mortgage. Fixed-rate mortgages offer stability with set monthly principal and interest payments. Adjustable-rate mortgages (ARMs) come with lower rates at the beginning of the loan term that change over time. Still, they can benefit if you relocate in a few years.
- Check for penalties. Some lenders assess prepayment penalties if you pay your loan off early. Confirm that this isn’t the case with your lender, or you could incur added costs when you refinance.
- Run the numbers. Consider the cost-savings associated with switching mortgages, including the monthly mortgage payment amount (if applicable) reduction and the money you’ll save by avoiding MIP. Compare this figure to the closing costs you’ll incur when refinancing to determine if it’s a smart financial move.
- Consult a mortgage professional. If you have questions or concerns, speak with a licensed mortgage professional. They can provide additional guidance and help you weigh the pros and cons of refinancing to make an informed decision.
Qualifying for an FHA to Conventional Loan Refinance
Here are some more specific suggestions to help boost your approval odds when seeking a conventional loan refinance.
Review Your Financial Goals
Determine why you want to refinance your FHA loan. The reason should be compelling and result in financial benefits. As previously mentioned, common reasons include reducing your interest rate, lowering monthly payments, or eliminating mortgage insurance premiums (MIP). Clearly defining your goals will help you choose the right loan product and terms that align with your specific needs and goals.
Check Your Credit Score and Equity
Your credit score should be at least 620, but a higher score also means you’ll get a better deal on a new loan. Lenders also want to see at least 3% or 5% in equity. If you’re able to reach the 20% mark, you could save even more by refinancing since PMI won’t be required.
The lender will order an appraisal to determine your property value and confirm your equity position. If the appraisal comes in too low, you could be denied refinancing.
Ensure You Have Stable Employment and Income
Stable employment and verifiable income are significant factors lenders consider when refinancing from an FHA loan to a conventional loan. Lenders will assess your employment history and income to ensure that you can comfortably manage the new loan payments.
Choosing the Right Lender
There’s no shortage of lenders offering conventional loans to borrowers looking to switch from FHA mortgages. That said, not all are worth considering. Here’s what to look for when narrowing down your options.
Assess Lender Eligibility
Inquire about the lending requirements to identify suitable options. Ask the lender about their minimum credit score, DTI and LTV requirements.
Compare Rates and Terms
Get quotes from several lenders to find the best deal on a conventional loan refinance. Remember, these are just estimates, though, and you won’t get concrete figures until you formally apply for a new mortgage.
Check the Lender’s Reputation
Read reviews from past and current borrowers to get a feel for the lender’s reputation. Also, check the Better Business Bureau (BBB) to learn if the lender is BBB-accredited and what rating they hold.
Submitting Your Application, Evaluation, and Closing
When refinancing from an FHA loan to a conventional mortgage, the process involves preparing financial documents, getting preapproved, reviewing the loan agreement and attending the closing.
Ensure You Have Complete Documents
Before applying, compile financial documents the lender will need to make a lending decision. This typically includes recent pay stubs, bank statements and W-w forms. You may also need to provide information about your current mortgage.
Get Preapproved
A preapproval gives you a more concrete idea of how big a loan you can access. It involves a credit check and a review of your application and supporting financial documents.
Go Through Underwriting
During the underwriting phase, the lender dives deeper into your application and verifies the information provided. The appraisal also happens during this stage, and you may have to provide additional documentation before receiving a final loan approval.
Read the Fine Print
Once you receive the clearance to close on the new loan, carefully review the terms and conditions of your new conventional loan. Be mindful of the interest rate, loan terms and accompanying fees.
Evaluate Refinance and Closing Costs
A few days before closing, you’ll receive a closing disclosure outlining the closing costs you’ll pay to finalize the loan. It generally includes origination fees, appraisal fees and the cost of the title search, among others. The final step is to attend closing and sign the loan agreement.
Frequently Asked Questions (FAQs) on FHA to Conventional Loan Refinancing
Yes, lenders require an appraisal to determine the current value of your home. But if you opt for an FHA Streamline Refinance, you may be able to bypass this requirement.
Some lenders let you roll closing costs into the loan. Or you may have the option to get a “no closing cost mortgage” in exchange for a higher interest rate.
On average, refinancing from an FHA loan to a conventional loan spans 30 to 45 days. However, the process could be shorter or longer depending on the lender, appraisal and underwriting timeline, and how soon you provide the requested loan documents.
