When you first purchased your home, you may have taken out the FHA loan. This allowed you to have a lower down payment and may have made it possible to get into a home in the first place. Now that you have been in the home for some time, you could use the equity you built up in the home to get rid of your expensive monthly mortgage insurance.
That monthly mortgage insurance is a cost that is found on all FHA loans. It is what helps offset some of the risk to the mortgage company for giving you the money in the first place. If you use the equity in your home and switch to a conventional, you can make that payment drop off faster and lower what you owe each month. But first, you must qualify.
Can I Refinance an FHA Loan to a Conventional Loan?
It is possible to refinance the FHA loan over to a conventional loan, as long as you meet the necessary requirements. For example, you will need to have a good credit score and a low debt to income ratio. Some of the situations where you may qualify to take your FHA loan and refinance it to a conventional loan include:
- You have a higher credit score: To do this refinance, you must have a 620 credit score, compared to the 500 that FHA required. If you are able to bring in a credit score that is at 740 and higher, you could be rewarded with better interest rates to keep the costs down.
- You have paid off a good deal of debt: Conventional lenders like it if your total monthly debt is 50% or less of your income. If you have paid off a good deal of your debt, then it may be easier to get the conventional loan that you need.
- You no longer need a co-borrower: if you are now making more money than you did when you purchased the home, you could remove the co-borrower from the loan and own the house by yourself.
- Your spouse has extra debt: When you live in a community property state, the debt of your spouse is counted against you with the FHA loan, whether or not you put their name on the loan. When you refinance to a conventional loan, you can take the spouse off it, no matter where you live, when doing the conventional loan.
You may want to talk to several lenders to determine what their requirements are and to compare rates and terms before you decide whether it is time to do a refinance on your current loan.
The Benefits of Refinancing from an FHA to a Conventional Loan
There are many benefits that come from doing a refinance from the FHA to the conventional loan. Some of these include:
Get Rid of Mortgage Insurance
If you are able to refinance to a conventional loan, you could get rid of the PMI. Conventional mortgages will not require you to have this type of insurance if you have a minimum of 20% equity in the home. FHA financing means you have to pay that mortgage insurance until the loan is paid off.
You Can Refinance Sooner
There are no time limits present on how soon you can refinance from the traditional FHA to a conventional. As long as you see a financial benefit and you qualify to do it, there is no need to wait to make the change. Compared to doing the FHA streamline plan, you can get the refinance done faster if this makes sense for you.
Tap Into Equity and Avoid Mortgage Insurance Again
It is possible to borrow up to 80% of the value of the home with both the FHA and the conventional cash out refinance. The problem with the FHA cash out refinance is that you will still have to pay the mortgage insurance. When you are able to do the conventional cash out loan, you will not be required to have mortgage insurance in place.
This cash out refinance can give you money to help pay off your debts, fix up the home, and do so much more, often at a lower interest rate than a personal loan.
The Negatives of Refinancing from an FHA to a Conventional Loan
While there are a number of benefits that come with this type of refinancing, there are also a few drawbacks that you need to know before you make the jump. Some of these drawbacks include:
- You may struggle to qualify if your score hasn’t gone up.
- You will pay higher PMI if you have a lower credit score to work with.
- It is important to have a low debt to income ratio. If you have a lot of debt still, then you may not qualify for the conventional loan.
- The interest rates are higher: Most of the time, conventional interest rates are going to be higher than the FHA one. You can shop around to help limit this a bit though.
- You can’t use any of the streamline refinancing options once you go over to the conventional mortgage.
- You may not qualify after a recent bankruptcy or foreclosure.
Choosing to Refinance Your FHA Loan to a Conventional Loan
Deciding to switch your FHA loan over to a conventional loan will be a personal decision. You have to take a look at some of the current rates, your current home equity, and your own finances to determine whether this is something you are able to do and if it makes financial sense for you to consider it.
As you make the decision, take some time to look at the different factors above. This can help you be more prepared for the refinance and will prevent you from making mistakes or jumping in too quickly. Once you have made the decision to refinance, take your time and shop around for some of the best lenders to help get the work done.