Big Benefits Of Refinancing From FHA To Conventional

Homeowners contemplating a switch from a Federal Housing Administration (FHA) loan to a conventional home loan stand to gain financial advantages. This shift can lead to reduced monthly payments and savings. So, what sets these two loans apart, and is transitioning from an FHA to a conventional loan the optimal choice for you? 

Let’s delve into the intricacies of refinancing between these loan types, explore the perks of this switch, and delve into key considerations when altering your loan structure.

Is it possible to refinance an FHA loan into a conventional loan?

Transitioning from an FHA loan to a conventional loan presents a beneficial option for borrowers who have boosted their credit scores and accumulated equity in their homes. Through this shift, you could potentially reduce your loan term, capitalize on decreased interest rates, and relish in reduced monthly payments.

Reasons to Switch from an FHA to a Conventional Loan

FHA loans stand out as a preferable choice for numerous first-time homebuyers when compared to conventional loans due to distinct advantages. Being government-backed, FHA loans typically feature more lenient criteria, such as lower credit score thresholds, since they are insured by the FHA.

While these loans might offer easier qualification, numerous homeowners choose to refinance from FHA to conventional loans at a later stage. This decision is frequently driven by the possibility of eliminating their mortgage insurance premium (MIP), reducing monthly payments, or accessing equity in their homes.

Transitioning from an FHA Loan to a Conventional Mortgage: Essential Requirements

Discover the essential requirements for refinancing to a conventional mortgage.

• Minimum credit score of 620 required
• Maximum debt-to-income ratio (DTI) of 50%
• Verification of income
• Confirmation of homeowners insurance
• Home appraisal or equivalent to assess property value

Benefits of Transitioning from an FHA to a Conventional Loan

Switching from an FHA to a conventional loan offers financial advantages. Discover how this shift can lead to savings for you.

Removal of Your Mortgage Insurance Premium (MIP)

When obtaining an FHA loan, an FHA MIP is mandatory, regardless of the down payment amount. There are two components: an upfront MIP due at closing and an annual payment spread out and included in your monthly mortgage payment.

For loans finalized on or after June 3, 2013, the duration of MIP payments hinges on the down payment size.

• A down payment of at least 10% results in an 11-year MIP payment period. 
• A down payment of less than 10% extends the MIP payment throughout the loan’s duration.

Comparison: Mortgage Insurance Premium vs. Private Mortgage Insurance

To avoid paying mortgage insurance with a conventional loan, a down payment of less than 20% necessitates private mortgage insurance (PMI), an additional monthly cost. However, unlike FHA loans from June 3, 2013 onwards, PMI can be eliminated once you build adequate equity in your home. You have the option to request PMI removal upon reaching 20% equity based on the original payment plan or wait for automatic cancellation at approximately 22% equity as per your servicer’s requirement.

If you hold an FHA loan, you will probably have to pay MIP for 11 years, or until your loan term finishes, irrespective of your equity situation. However, by refinancing from FHA to conventional, you may have the opportunity to eliminate that monthly fee.

Reduced Interest Rates

Refinancing your home loan means securing a new interest rate. Although conventional loan rates tend to be slightly higher than FHA rates, refinancing during a period of lower rates than when you initially borrowed could lead to savings with a reduced interest rate. Given that interest is paid over the loan’s duration, a lower rate has the potential to save you thousands of dollars.

Disadvantages of Switching from an FHA to a Conventional Mortgage

Refinancing a mortgage constitutes a significant financial choice. While it can yield positive financial effects, it’s important to recognize that it necessitates an investment of both money and time.

Closing Costs

When switching from an FHA to a conventional loan, potential savings can come from dropping insurance or securing a lower interest rate. However, this move involves paying closing costs, typically ranging from 3% to 6% of the loan balance. For instance, with a $200,000 loan balance, closing costs could total $6,000 to $12,000. 

Considering the expenses linked to refinancing, it’s crucial to weigh if the savings justify the costs. To determine the viability of refinancing, calculating the break-even point is key – the juncture where the refinance becomes financially beneficial, saving you money rather than offsetting your savings.

Reiterate the Loan Approval Procedure

Refinancing can also impact you in terms of time. Despite having an existing home loan, you will have to restart the application and loan approval procedures for the new loan. This involves undergoing a credit check, submitting specific documents, and possibly undergoing another home appraisal. Documentation that will probably be required includes:

• Copy of your homeowners insurance policy
• W-2s, tax returns, 1099s
• New lender’s title insurance policyRequired Documents:
• Recent pay stubs

Options Besides Refinancing Your FHA Loan to a Conventional Loan

If handling all that feels overwhelming or if switching to a conventional loan isn’t feasible, consider an FHA Streamline Refinance as a viable alternative. This option offers refinancing benefits while keeping your current loan type. Although you could potentially lower your interest rate and monthly payment, note that mortgage insurance remains and closing costs are still required. Notably, FHA Streamline typically incurs lower mortgage insurance expenses.

This type of refinance offers an added advantage: a quicker, more streamlined process. This is because it typically involves less paperwork and may forgo the need for an appraisal. While an FHA Streamline may entail a reduced assessment of credit factors, a credit check is still mandatory. 

If you fall short of the minimum credit score criteria for refinancing to an FHA Streamline or a conventional mortgage, it may be worthwhile to explore refinancing options tailored for bad credit.

Refinancing from an FHA to a Conventional Loan: Frequently Asked Questions

Still curious about switching from an FHA to a conventional loan? Delve into these FAQs to find answers to common queries on the subject.

Can I refinance out of an FHA loan?

You can refinance from an FHA loan if you qualify for a conventional loan with a credit score of 620 or above and have 5% to 25% equity in your home. With 20% equity, you might even eliminate your mortgage insurance, reducing your monthly payments.

How soon can I refinance an FHA loan to a conventional loan?

To transition to a conventional loan through refinancing, certain conditions must be met:

• For a cash-out conventional loan, a minimum of 12 months should have lapsed since the previous mortgage was closed.
• For a rate and term conventional loan, one client must be listed as an owner before submitting your loan application.

Upon fulfilling these criteria, the key focus shifts to meeting the requirements for a conventional loan.

When should I refinance my FHA loan to a conventional loan?

Refinancing to a conventional loan may prove beneficial when your credit score has risen, interest rates are lower, or you intend to reside in the house long term to recover your closing costs. Otherwise, you might not experience the advantages previously mentioned.

The Takeaway

Refinancing from an FHA loan to a conventional one offers several potential advantages, such as eliminating mortgage insurance, reducing interest rates, and saving money. While these benefits can align with your financial objectives, it’s crucial to factor in closing costs to ensure its long-term value. Exploring alternatives like an FHA Streamline can provide refinancing benefits while sticking with an FHA loan.

Dive deeper into your refinancing possibilities and kick off your initial mortgage approval process today with Elevation Mortgage.