Many homebuyers don’t have a 20% down payment or high credit score, so they turn to FHA loans to buy their home. FHA mortgages have many advantages, but they may have higher annual costs than conventional loans in many cases. So, it can be beneficial when your credit and financial situation improves to refinance an FHA loan to a conventional home loan.

You can refinance an FHA mortgage to a conventional mortgage at any time, as long as you meet the qualification criteria. Fannie Mae and Freddie Mac do not have a minimum wait time to refinance a loan. So, if you have had your FHA loan for a year and your credit score has improved, you may be able to qualify for a conventional refinance.

How To Refinance An FHA Loan to Conventional Loan

If you have an FHA mortgage loan and you are ready to refinance it, here’s what you should do:

Figure Out Why You Want to Refinance

What is the reason you want to refinance? Do you want to get a lower rate, lower payment, get rid of PMI, or something else?

It also matters how long you want to keep the home and loan, so you know the kind of conventional mortgage you want. There are many conventional mortgages available, including 15- and 30-year loans, fixed rate, variable rate, and more.

Apply With Several Lenders

Once you know why you want to refinance, you should apply for the same loan with three or four lenders. For example, if you want a 30-year, fixed rate conventional loan, apply for that mortgage with several lenders. That way you can see who offers the lowest rate and fees. The same loan product can be a different price and rate with several different lenders. Fannie Mae and FHA are known for the first time home loans, but they remain competitive for refinancing as well.

Review Loan Offers

Each conventional mortgage lender must give you a Loan Estimate will all of the fees and costs laid out, including the interest rate. Compare each conventional loan estimate so you can choose the one that makes the most financial sense.

Get Approved

After you select your conventional lender, you will need to be approved by the underwriting department. You will give underwriting your financial documents that support your income and assets that you gave on the application. They will review your tax returns, pay stubs, bank statements and assets so they can decide if they will approve the loan to close.

What Are the Requirements to Refinance an FHA Loan to Conventional Loan?

Lending requirements vary by lender, but you can expect these standards when you apply for a conventional refinance:

  • Minimum 620 credit score
  • 43% debt-to-income ratio
  • At least 3% home equity
  • Proof of stable income that is going to continue

Should You Refinance an FHA Loan to Conventional Loan?

Some of the advantages of refinancing include:

Lowering Your Rate

You need a higher credit score to get approved for a conventional loan. So, you may be able to get a lower interest rate if you have a better credit score since you got your FHA loan.

Get Rid of Mortgage Insurance

One of the major disadvantages of FHA loans is you have to pay for mortgage insurance for the life of the loan or at least 11 years, depending on what your down payment was.

With conventional loans, you pay for mortgage insurance until you have 20% equity. If you have that much or more equity, you can lose your mortgage insurance when you refinance.

Avoid The Upfront Mortgage Insurance Premium

If you want to refinance to lower your rate, you could get another FHA loan. But you will need to pay your upfront mortgage insurance premium again, which is probably a few thousand dollars. You can wrap that cost into the loan amount but you will pay interest on it for the life of the loan.

On the downside, it’s harder to qualify for a conventional loan, and you will need to pay closing costs when you refinance. Also, if you don’t have 20% equity, you will still need to pay mortgage insurance.

What Are the Alternatives?

Refinancing from an FHA into a conventional loan is often a good choice, but there are other options. Many people simply do a streamline FHA refinance into a new FHA loan at a lower rate.

An FHA streamline refinance can be a smart move because you don’t need a new appraisal and there usually isn’t any credit or income check. If you have below-average credit, we recommend refinancing with FHA for a second chance loan because their credit score requirements allow for lower fico scores.

To meet the qualifications for this option, you need the following:

  • Have an FHA loan for at least 210 days.
  • You’ve paid the mortgage on time for the last six months.
  • You are not pulling out equity.
  • The home is your primary residence.
  • The new loan won’t extend your term by more than 12 years.
  • The loan gives you a financial benefit, including at least a .5% lower ate or you are refinancing from an ARM to a fixed-rate loan.

Summary

Yes, you can refinance your FHA loan into a conventional loan. Depending on your circumstances, you may want to make this move to lower your rate and possibly get rid of mortgage insurance.

There are many factors involved to decide if now is the time to refinance your mortgage. Talk to your mortgage professional today to learn if it makes sense to refinance your FHA loan into a conventional loan.