Refinancing an FHA loan to a conventional loan

If you used an FHA mortgage to buy your home, you’re not limited to refinancing into another FHA loan. Depending on your financial circumstances, you might choose to refinance your FHA loan into a conventional loan. Whether this is the right choice for you depends on a variety of factors.

• Can you refinance an FHA loan to a conventional loan?
• How to refinance from an FHA loan to a conventional loan
• Requirements for refinancing from an FHA loan to a conventional loan
• How soon can you refinance an FHA loan to a conventional loan?
• Should you refinance your FHA loan to a conventional loan?
• FHA Streamline Refinances

Can you refinance an FHA loan to a conventional loan?

Yes, it’s possible to refinance an FHA loan to a conventional loan. But this option may not be open to everyone.

One of the selling points of an FHA loan is its lenient qualifying criteria. You may qualify for an FHA mortgage with a credit score as low as 500 by making a 10% down payment, or a credit score of 580 with a down payment as low as 3.5%.

Conventional loans generally require a higher credit score: 620 is typically the lowest score mortgage lenders accept. To refinance into a conventional loan, you’ll need to meet the more stringent requirements for a conventional loan — including that higher credit score.

How to refinance from an FHA loan to a conventional loan

To refinance an FHA loan to a conventional loan, you’ll follow the same general steps as you’d take in any mortgage refinance. Here’s how to proceed.

Step 1: Decide if it’s the right time to refinance

Refinancing may be a good idea in a variety of circumstances. People often refinance their mortgages to take advantage of lower interest rates. Find out the interest rate on your current mortgage, and compare it to interest rates offered today. Even a small reduction in your rate can translate to thousands of dollars in savings over the life of your mortgage. A loan officer or an online refinance calculator can help you see how much you’ll save.

Other common reasons to refinance include:

• Switch from an adjustable-rate mortgage to a fixed-rate loan.
• Change the term of your loan to a longer or shorter period. Longer terms typically equal lower payments, while a shorter term helps you pay off your loan faster.
• Access the equity in your home through a cash-out refinance.

However, in some cases, refinancing may not be a good idea. If you’re planning to move soon, you likely won’t be able to recoup the money you’ll spend on closing costs through lower payments. If your financial situation has worsened since you first took out your mortgage, you may not be able to get a new loan with good terms. You may also have a hard time refinancing if your home value has fallen.

Step 2: Check your credit score

Your credit score is a major factor in whether you qualify for a refinance loan and the interest rate you’re offered. People with higher scores typically have an easier time getting a loan and pay lower rates. You can request a free copy of your credit report from each of the three major credit bureaus — Equifax, Experian, and TransUnion — once per year using AnnualCreditReport.com.

When you receive your report, look carefully for any errors like incorrect balances, or accounts listed as past due that are actually current. If you find a mistake, you can dispute the information with the credit bureau that issued the report and have it corrected. This may boost your score.

Step 3: Shop around for a mortgage loan

Different lenders may offer significantly different rates and terms on a refinance loan. Check with your current lender about refinance options, but also request rate quotes or prequalify for a refinance loan with several other lenders to see whether you’re likely to get a loan and with what terms. Be sure to look not just at the interest rate offered, but also factors like fees and closing costs, and whether your current lender charges a prepayment penalty.

Step 4: Apply for your refinance loan

When you’ve found the best offer, you can move on to the formal application. The lender you choose will give you instructions on how to apply for the loan. Just like when you bought your home, you’ll generally need to show documentation of your income and assets. This can include providing tax returns, W-2 forms, pay stubs, and bank account statements.

Step 5: Close on your refinance loan

While you won’t be getting any keys, closing on a refinance loan is similar to when you bought your home. Your loan officer will provide instructions on when and where to meet to sign the closing documents.

If you’ve chosen to refinance with a different lender, make sure you continue to pay your old mortgage until you have confirmation that it has been paid off. Your new lender will provide instructions on how to begin paying your new mortgage.

Requirements for refinancing from an FHA loan to a conventional loan

To refinance from an FHA loan to a conventional loan, you’ll need to meet the requirements for a conventional mortgage. These generally include:

• Credit score of at least 620
• Home equity of at least 3% to 5%
• Debt-to-income ratio of 45% or below
• Proof of homeowners insurance
• Ability to document enough income to make your payments

THINKING OF REFINANCING YOUR MORTGAGE? HERE’S THE CREDIT SCORE YOU’LL NEED

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

You can refinance your FHA mortgage into a conventional loan as soon as you can meet the qualifying requirements for your new loan. There are no waiting periods, often referred to as "seasoning" requirements, for this type of transaction.

Other mortgage refinances may have waiting periods. In most cases, you’ll have to wait six months before you can qualify for a cash-out refinance. To complete an FHA Streamline Refinance, you must wait 210 days and make at least six on-time payments in that period.

Should you refinance your FHA loan to a conventional loan?

You may want to refinance your FHA mortgage to a conventional loan if your finances have improved since you first bought your home. Conventional loans could offer better terms than you currently pay. However, refinancing may not always be a good idea. Here are some pros and cons of refinancing your FHA loan to a conventional loan.

Pros of refinancing from an FHA loan to a conventional loan

Refinancing may be worthwhile for the following reasons:

May lower your interest rate

If your credit score has improved and you can qualify for a conventional loan, you may be able to refinance to a lower rate — saving you thousands of dollars in interest payments over the life of your loan. Lower interest rates also typically mean lower monthly payments.

Ability to drop mortgage insurance

Most FHA loans require you to pay an annual mortgage insurance premium for as long as you have the loan. Generally, you can only cancel your premium if you make more than a 10% down payment on an FHA loan — and then only after 11 years of payments.

With conventional loans, you’ll usually need to pay for private mortgage insurance (PMI) if you make less than a 20% down payment. But canceling PMI is a lot more straightforward. When you reach 20% equity in your home, through a combination of monthly payments and home price appreciation, you can ask your lender to cancel your private mortgage insurance or refinance into a new loan without PMI.

As you’re refinancing your FHA loan to a conventional loan, try to avoid mortgage insurance entirely so that you can save money on your monthly payments.

Loan limits are higher

If your home has increased significantly in value, you may have a hard time refinancing your FHA loan due to the federal program’s loan limits. In most parts of the country, the FHA loan limit in 2022 is $420,680 (or $970,800 in some higher-cost areas). If your home is worth more than your area’s FHA loan limit, you may not be able to refinance into another FHA loan.

However, the loan limit on most conventional loans is $647,200 (or, again, $970,800 in higher-cost areas). Your home may fall within that limit, making a conventional loan a feasible option.

Cons of refinancing from an FHA loan to a conventional loan

You’ll want to keep these things in mind before you refinance from an FHA loan to a conventional loan:

Closing costs

When you refinance a mortgage, you’ll need to pay closing costs just as you did when you first bought the house. These may include a loan origination fee, points, appraisal fees, attorney fees, and title fees. Put together, closing costs can amount to between 3% and 6% of the loan — or $9,000 to $18,000 on a $300,000 loan. You’ll want to make sure that the amount of money you’ll save by refinancing will recoup your closing costs.

Lengthy loan applications

When refinancing, you’ll also go through the same application process and documentation that’s required when you buy a home. You’ll need to dig out all your tax forms, pay stubs, W-2s, and other documents to be approved. This can be tedious, stressful, and time-consuming.

Higher credit score requirements

Going from an FHA loan to a conventional loan means you’ll need to meet the stricter qualifying requirements of a conventional loan. This includes a credit score of 620 or higher, compared with a minimum of 500 for an FHA loan.

WHEN IS THE RIGHT TIME TO REFINANCE MY MORTGAGE?

FHA Streamline Refinances

If you’re strictly looking to lower your interest rate, you may consider an FHA Streamline Refinance. This refinance option keeps you in an FHA loan, but includes much less paperwork and cost than a traditional refinance. No new appraisal is required either, saving you time and money. You may also be able to refinance without going through credit approval.

To qualify for an FHA Streamline Refinance, you must:

• Have an FHA loan.
• Show a "net tangible benefit" to the refinance, typically meaning a lower interest rate that will save you money.
• Have had your FHA loan for at least 210 days and made at least six payments.
• Be current on your payments.

If you’re refinancing to take cash out of your home equity, you may choose another type of loan. These can include cash-out refinances, home equity loans, or home equity lines of credit (HELOCs).