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Can You Refinance FHA to Conventional Mortgage?

TLDR

What You Need To Know

  • Refinancing from an FHA loan to a conventional mortgage when mortgage rates are low can get you a lower interest rate and remove the mortgage insurance premium (MIP)
  • You need a minimum credit score of at least 620 to qualify for a conventional loan[1]
  • With conventional loans, you can opt for a cash-out refinance if you have enough equity in your home

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Did you finance your home with a Federal Housing Administration (FHA) loan? FHA loans are attractive to borrowers with less-than-ideal credit scores or lower amounts saved for down payments, unlocking the door to homeownership for many aspiring first-time home buyers. 

But your circumstances can change – and they can change for the better. 

If your finances have improved and your credit score has gone up since you took out your FHA loan, it may be time to refinance your FHA loan to a conventional loan.

We can help you navigate the refinancing process and outline the requirements you’ll need to satisfy to make the switch. 

Refinancing From FHA to a Conventional Mortgage

The “F” in FHA loan doesn’t have to stand for “forever.” If you bought your home with the help of an FHA loan and want to explore a conventional mortgage, you may find that the benefits are worth the switch.

Refinancing from an FHA loan to a conventional mortgage when mortgage rates are low can get you a lower interest rate and remove the mortgage insurance premium (MIP). 

However, switching from an FHA loan to a conventional mortgage isn’t as simple as wanting to do it. To be eligible for a refinance, you’ll need to meet a few conditions, including: 

  • Credit score: You need a minimum credit score of at least 620 to qualify for a conventional loan.(1)
  • Debt-to-income (DTI) ratio: DTI is the amount of your income dedicated to paying off your monthly debts. The DTI ratio requirement will vary from lender to lender, but you typically need a DTI ratio of less than 45% to qualify.(2)
  • Income: Your lender must confirm that you earn enough income to afford the new loan and the cost of refinancing your original mortgage. 
  • Home appraisal: An appraisal will help determine how much equity you have in your home. If you have at least 20% equity in your home, you can avoid paying private mortgage insurance (PMI) after you refinance. 

When Should You Refinance From an FHA to a Conventional Mortgage?

Before you refinance from an FHA loan to a conventional loan, you should decide whether it’ll be worth the effort. 

If any of the following conditions apply to your situation, it may be a sign that it’s a good time to replace your FHA loan with a conventional mortgage. 

Here’s what to consider before refinancing:

You want to get rid of mortgage insurance premiums (MIPs)

How long you pay MIP on your FHA loan will depend on the size of the down payment you made. If your down payment was less than 10%, you’re stuck with MIP until you fully pay off your mortgage. If you put down 10% or more, you’ll be done with MIP after 11 years of payments. 

In order to remove MIP you’ll have to refinance your FHA loan to a conventional loan. Though you may wind up paying PMI for the conventional loan if you have less than 20% equity in your home. 

MIP and PMI are both types of mortgage insurance, but MIP applies to FHA loans, and PMI applies to conventional mortgages. Again, to avoid PMI on your conventional loan, you’ll need to have at least 20% equity in your home.

Your credit score is higher

If you had a credit score of 590 when you first bought your house and it’s currently sitting at 630, you will likely meet a lender’s credit score requirement for a conventional mortgage refinance. Most lenders require a credit score of at least 620 to qualify for a conventional loan.

Pro tip: The higher your credit score, the better refinance interest rates a lender will offer. 

You’ve built up enough equity

The amount of equity you have in your home can provide a significant advantage when you’re ready to refinance. 

As a general rule of thumb, you can avoid paying mortgage insurance on a conventional loan if you refinance with at least 20% equity in your home. If you think you’ve built enough equity, it might be time to reach out to a loan officer about a refi to a conventional loan. 

Interest rates are falling

Falling interest rates can signal that it’s a good time to refinance your FHA loan. With lower rates, you may be able to get reduced monthly mortgage payments. If you’re paying off a shorter-term mortgage, a lower rate can help make your payments more affordable.

Talk to a mortgage professional about when it makes sense to refinance. But if market interest rates are higher than the rate on your existing loan, it may make sense to hold off on a conventional loan refinance. 

You plan to keep the home for the foreseeable future

If you plan on living in your home for a while, a refinance may be a worthwhile decision. 

Considering the amount of work and money that goes into refinancing a loan, it makes sense to move to a conventional mortgage if you plan on living in your home for a long time. When you’re considering a refinance, you must weigh the benefits of refinancing with the costs you’ll pay to refinance. 

How Does Refinancing an FHA Loan Work? 

Refinancing your FHA loan is similar to the process you went through to purchase your home. Like the first time you took out a mortgage, you’ll need to prepare pay stubs, tax returns and other financial documents for your lender. 

You’ll likely need a home appraisal during the refinancing process. But Fannie Mae and Freddie Mac do have no-appraisal mortgage refinance programs that allow homeowners to skip the home appraisal, so ask your mortgage lender if you can skip the appraisal

From completing the application to underwriting and closing, the refinance will typically take around 45 days to complete. 

Pros and Cons of Refinancing from an FHA to a Conventional Loan

Before you delve into the application and underwriting process, review the pros and cons of refinancing an FHA loan to a conventional mortgage.

PROS of Refinancing From FHA to Conventional Mortgage👍

Lose the FHA mortgage insurance requirement

Mortgage insurance adds up over time. And depending on the size of your down payment, you may pay MIP for the life of the loan. Refinancing can remove this additional monthly cost.

Secure a lower interest rate

One of the best reasons to refinance is getting a lower interest rate than what you already have. By getting a lower rate you can potentially save thousands over the life of your loan.

CONS of Refinancing From FHA to Conventional Mortgage👎

You must pay closing costs

When you refinance, you replace your existing mortgage with a new mortgage. And when you take out a mortgage, you must pay closing costs. If you don’t have the cash on hand to pay the costs upfront, you may be able to roll your closing costs into your loan.

Possibility of PMI

If you don’t have at least 20% equity in your home when you refinance, you may be required to pay PMI.

Repeat the mortgage approval process

The application and underwriting process requires a lot of time and effort. There are reams of documents to collect, submit and sign and an equally long checklist of other requirements.

Alternative to Refinancing Your FHA Loan to a Conventional

If you’re not interested in refinancing your FHA loan to a conventional loan, there are other alternatives for an FHA loan refinance. We’ll consider the FHA Streamline Refinance

The program offers homeowners a fast, streamlined loan refinance. Your loan will remain an FHA loan, and you may be able to get a lower interest rate. 

With an FHA Streamline Refinance, you may benefit from lower mortgage insurance costs, reduced monthly payments and no home appraisal requirement. 

A More Affordable Home

While an FHA loan may have opened the door of homeownership to you, refinancing to a conventional mortgage may help make homeownership more affordable over time. 

With a refinance, you can take advantage of lower interest rates, reduced monthly mortgage payments, canceled mortgage insurance and more flexible loan terms. Work on your income, savings and credit history to draw the most benefit from your move to a conventional loan. These factors should meet (or exceed) your lender’s qualifications. To put yourself in a position to receive favorable refinancing rates and terms, work on improving your credit score and building equity in your home.

  1. Fannie Mae. “B3-5.1-01, General Requirements for Credit Scores (10/05/2022).” Retrieved November 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-1-Credit-Scores/1032996841/B3-5-1-01-General-Requirements-for-Credit-Scores-08-05-2020.htm

  2. Fannie Mae. “B3-6-02, Debt-to-Income Ratios (05/04/2022).” Retrieved November 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032992131/B3-6-02-Debt-to-Income-Ratios-02-05-2020.htm

ICYMI

In Case You Missed It

  1. If your home has enough equity in it or you’ve put down a large down payment, you won’t be required to pay monthly mortgage insurance when refinancing

  2. If you plan on keeping your home for a while, a refinance may be a worthwhile decision

  3. Falling interest rates can signal that it’s a good time to refinance your FHA loan

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