Refinance an FHA loan into a conventional loan

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Homebuyers who don’t have a large down payment or a high credit rating often rely on FHA loans to become homeowners. However, refinancing from an FHA loan to a conventional loan can save you money in the long run if your finances are stronger now.

Here’s how lenders will review your eligibility for a conventional refinance — and how you can decide if switching from an FHA loan to a conventional loan is right for you:

Can you refinance an FHA loan into a conventional loan?

Yes, it is possible to refinance an FHA loan into a conventional loan. If you currently have a Federal Housing Administration-insured home loan, chances are your credit score is too low to qualify for a conventional mortgage. This is common for new buyers.

However, if your credit has improved, you may qualify for a conventional loan now. Credible can help you compare refinance rates

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

You can refinance an FHA loan into a conventional loan as soon as you qualify. Fannie Mae and Freddie Mac, the two main entities that set the standards followed by many conventional lenders, have no seasoning requirements (waiting periods) for rate and term refinances.

Some refinance loans require you to wait a certain number of days after taking out your original home loan before you can refinance. A streamlined FHA refinance, for example, has a waiting period of 210 days. A conventional cash-out refinance, on the other hand, has a six-month seasoning requirement in most cases.

Point: Some lenders impose their own stricter standards on borrowers. If a lender doesn’t approve your refinance application for this reason, keep shopping around. Chances are you’ll find a lender that doesn’t make you wait.

To see: How Long You Can Refinance: Typical Waiting Periods Per Home Loan

How to Refinance from FHA to Conventional

If you want to refinance an FHA mortgage to a conventional mortgage, follow these steps:

1. Determine why you want to refinance.

Knowing whether you want a lower interest rate, lower mortgage payments, or both, and how long you plan to hold onto your loan, will help you determine which type of conventional home loan to apply for. You will have many options, ranging from 30-year fixed rate loans to 5/1 adjustable rate mortgages (ARMs).

2. Request the same type of loan from several lenders.

For example, request a 30-year fixed rate loan from each lender. This way, you’ll be able to accurately compare mortgage rates and costs and see which lender can offer you the best value.

Good to know: Submitting multiple mortgage applications at around the same time won’t hurt your credit score, as long as you submit the applications within 30 days. Ideally, you would submit all of your applications on the same day so you know that each lender is rating you based on the same overview of your credit report.

3. Evaluate loan offers.

Every lender you apply to is legally required to provide you with a loan estimate. This standardized document sets out all the terms of the loan to which you are entitled, including the interest rate and a detailed list of closing costs. You can then select the loan that best suits your goals.

4. Pass the subscription.

Once you have chosen your lender, you will go through the subscription process. You will submit documents, often electronically, that support the income and assets you declared in your application. The underwriter will review these documents (which typically include tax returns, recent pay stubs, and bank statements) to ensure that you are fully qualified and the loan can be completed.

Requirements for Refinancing from an FHA Loan to a Conventional Loan

Generally, here are the minimum requirements you will need to meet for a conventional loan:

  • 620 credit score
  • 43% DTI ratio
  • 3% home equity
  • Steady revenue track record expected to continue

Should I refinance my FHA loan into a conventional loan?

The main reason to refinance from an FHA loan to a conventional loan is, unsurprisingly, to save money. But there are other pros and cons to consider.

Benefits of Refinancing from an FHA Loan to a Conventional Loan

Lower your interest rate

Since conventional loans have higher credit score requirements, you may qualify for a lower rate now if your credit has improved since you took out your FHA loan. Your overall financial situation and market conditions will also affect your rate.

Eliminate Monthly Mortgage Insurance (MIP) Premiums

When you take out an FHA mortgage, you are obligated to pay monthly mortgage insurance premiums for 11 years or the term of the loan, depending on the amount you have set aside. With a conventional loan, you may have to pay private mortgage insurance (PMI) until you have 20% equity, but then you will be freed from this monthly expense.

Learn more: How to Get Rid of FHA Mortgage Insurance

Avoid paying the initial mortgage insurance premium (UFMIP)

You can refinance into another FHA loan, but you will have to pay another initial mortgage insurance premium. You may qualify for a reduced UFMIP if it hasn’t been more than three years since you took out your existing loan, but if not, you’ll be responsible for the full amount.

Disadvantages of Refinancing from an FHA Loan to a Conventional Loan

Closing costs

Closing costs are part of any mortgage refi. You will be responsible for loan origination fees, title search and title insurance fees, the cost of an appraisal, and closing services. These costs can total thousands of dollars; they generally represent 2 to 5% of the loan amount. You may be able to reduce them by paying a higher interest rate.

GPA

If you don’t have 20% equity yet, you’ll usually have to pay PMI with a conventional loan until you hit that magic number. You will want to consider how much the PMI will cost compared to the MIPs both in the short and long term.

More stringent requirements

You might have a harder time qualifying for a conventional loan than an FHA loan if you’ve had trouble qualifying for a home loan before and your finances haven’t improved much. If you’re unhappy with the conventional refinance offers you receive, consider applying for an FHA refinance to see how the rates and fees compare.

To verify: Should You Refinance Your FHA Loan?

Alternatives to refinancing a traditional loan

Refinancing your FHA loan into a conventional loan is just one of your refinancing options. A simplified FHA refinance could be a great alternative, especially if your home’s value has dropped or your income has dropped.

The FHA has minimum underwriting requirements for this type of refinance. You also won’t have to pay for a home appraisal. Streamlining refinancing usually means less paperwork and less hassle.

In general, you will need to meet these requirements to qualify for a streamlined FHA refinance:

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