Many first-time home buyers opt for a loan backed by the Federal Housing Administration (FHA.) FHA loans make it easier to get financing, permit a lower down payment, and are flexible for applicants with less than perfect credit scores. But as your equity, credit, and goals change, the more important question becomes whether refinancing from FHA to a conventional loan actually makes financial sense.
For many borrowers, the decision comes down to mortgage insurance, total monthly cost, and what you want the refinance to accomplish. Refinancing into a conventional mortgage may help you remove FHA mortgage insurance and change your loan structure, but it does not automatically guarantee a lower rate or lower payment. In some cases, staying with FHA or using an FHA Streamline refinance may be the better fit.
An FHA loan can be refinanced to a conventional loan as long as you meet minimum equity requirements. Typically, you’ll need sufficient equity in your home, and conventional PMI can generally be removed once you reach about 20% equity. This is fairly easily achieved if you are already some years into your home loan.
If these conditions are met, you can refinance from an FHA to a conventional loan and remove FHA mortgage insurance. If you don’t quite meet the equity minimum for a conventional loan, you may be able to refinance and continue paying PMI for a time; under applicable rules, you may be able to request PMI cancellation when the scheduled principal balance reaches 80% of the home’s original value if you meet the lender’s requirements.
FHA mortgage insurance works differently from conventional mortgage insurance, and that difference is one of the main reasons some homeowners refinance out of an FHA loan.
With FHA financing, borrowers typically pay two forms of mortgage insurance: an upfront mortgage insurance premium (UFMIP) at closing and an annual mortgage insurance premium (MIP) that is usually divided into monthly payments. By contrast, conventional loans may require private mortgage insurance (PMI) when you have less than 20% equity, but that is separate from FHA MIP and follows different cancellation rules.
An upfront mortgage insurance premium (UFMIP) is due as a one-time payment at closing. The UFMIP costs 1.75% of your FHA loan’s base loan amount. For example, the up-front cost on a $200,000, 30-year fixed FHA loan with 3.5% down would be equal to a $3,500 upfront mortgage insurance premium.
An annual mortgage insurance payment (MIP) is also required on many FHA loans. This annual cost is typically split up and added to your monthly mortgage payment. The amount can vary based on the loan’s characteristics, and exceptions may apply.
If you refinance from FHA to conventional with enough equity, you may be able to eliminate mortgage insurance altogether. If you refinance before reaching that level of equity, you could still trade FHA MIP for conventional PMI for a period after closing.
If you have an FHA loan but recently tipped over the 20% equity marker, it may not make sense for you to keep paying for mortgage insurance. Even an added monthly cost adds up over the years. Switching away from an FHA loan can eliminate these additional costs.
If your FHA loan was an adjustable rate mortgage (ARM) switching to a conventional mortgage from an FHA makes even more sense. By switching to a conventional fixed rate mortgage, you can lower your monthly payment. You might even be able to qualify for a cash-out option if your equity is high enough.
You will need to go through the conventional loan vetting process, which can mean providing updated documentation. You may also have to pay for a new appraisal of your home. If the LTV doesn’t allow you to meet equity requirements, you may still have to pay PMI for a period after refinancing.
Expect to pay refinancing costs as well. These can amount to as much as 2-5% of the amount of your loan, and may not be able to be rolled into your loan amount. Make sure that you’ll still come out ahead if you’re refinancing to get out from under FHA costs.
If you can’t meet the requirements for a conventional loan but still want to refinance, an alternative option is to apply for an FHA Streamline Refinance. This program allows FHA homeowners trapped in a high-interest ARM or fixed-rate mortgage to refinance quickly and easily to take advantage of a lower rate without the complications of in-depth documentation, credit, or income verification.
If the value of your property has decreased, interest rates on an ARM keep going up, or your income has been reduced, you could be at risk for default. The Streamline program was designed specifically to help reduce loan defaults. If you want to apply for a Streamline FHA refi, you must:
You won’t be able to get a cash-out with an FHA Streamline refinance. You’ll also have to continue paying PMI, but any PMI will be absorbed into your new mortgage instead of being due up-front at closing.
For a FHA Streamline refi, you’ll also need to demonstrate a Net Tangible Benefit, which is your valid reason for refinancing. The benefit can be any of the following:
If you’re still not sure about which loan product is right for you, ask yourself the following questions:
Do you want to stop paying PMI? If so, a refi into a regular loan might be your best bet. The same applies if you have an ARM and want a lower, fixed interest rate.
If your equity is high, and you need to be able to access some cash, converting from an FHA to a conventional mortgage makes sense.
If you owe more on your home than it is currently worth, an FHA Streamline refinance probably is the best option for you.
Many lenders are tightening restrictions on conventional home loans, and a formerly adequate credit score might not now make the grade. In that case, your FHA loan might be as good as it gets.
Refinancing an FHA loan to a conventional loan means you’ll need to qualify for the conventional loan. If you can’t provide documentation to prove you’re a good risk, sticking with an FHA Streamline might be the easiest way to better your situation.
The loan officers at Sammamish are skilled at helping homeowners find the right refinance option for their home loan. Whether you want to convert your FHA loan to a regular loan, or simply complete an FHA Streamline refi, we can help you find the solution that best suits your needs.
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.
Yes. You can refinance an FHA loan into a conventional loan if you meet the lender’s requirements, including having enough equity in the home. Many borrowers make this move to remove FHA mortgage insurance or change their loan structure.
In many cases, borrowers look to refinance once they have about 20% equity because conventional mortgage insurance can generally be removed at that point. If you have less equity, you may still be able to refinance, but you could need to keep paying PMI for a period after closing.
The timing depends on whether you can qualify for the conventional loan, including meeting equity and documentation requirements. The key factor is not simply how long you have had the FHA loan, but whether your finances and home equity now support the refinance.
It can be worth it if refinancing helps you eliminate FHA mortgage insurance, switch from an ARM to a fixed-rate loan, change your loan term, or access cash with enough equity. It may be less worthwhile if the new loan does not reduce your overall monthly cost enough to offset closing costs.
No. Refinancing to a conventional loan does not automatically mean a lower rate or lower payment. The result depends on your new interest rate, loan term, closing costs, and whether mortgage insurance is removed or replaced with PMI for a time.
Refinancing costs can range from about 2% to 5% of the loan amount. Because of those costs, it is important to compare the savings from removing FHA-related costs or changing loan terms against what you will pay to complete the refinance.
Yes, in some cases. You may be able to refinance into a conventional loan before reaching 20% equity, but you may have to continue paying PMI after closing. Under applicable rules, you may later be able to request PMI cancellation when the scheduled principal balance reaches 80% of the home’s original value if you meet the lender’s requirements.
The article does not give a specific minimum score, but it notes that lenders may apply tighter standards for conventional loans than for FHA financing. A credit score that worked for an FHA loan may not always be enough for a conventional refinance.
An FHA Streamline refinance may be a better fit if you cannot meet conventional loan requirements but still want to lower your rate or move out of a high-interest ARM. It can also make sense if your property value has fallen or if reduced income makes a simpler refinance process more important.
Yes, if you refinance into a conventional loan with enough equity, you may be able to eliminate mortgage insurance altogether. If you refinance before reaching that equity level, you may still replace FHA MIP with conventional PMI until you qualify to have PMI removed.
Our loan officers are ready and waiting to help you apply for your home loan.
Learn more about the people behind Sammamish Mortgage
Whether you’re buying a home or ready to refinance, our professionals can help.
Mortgage Support — 24/7
No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.
Adjust the parameters based on what you want to track
