When you’ve taken out a mortgage to help you buy your home, you may be able to change your home loan terms later on as your financial situation changes. Refinancing a mortgage can help you adjust your mortgage terms, lower your monthly payment, take advantage of lower interest rates, eliminate extra fees and change the terms of your mortgage so it works better for your current financial situation.
If you purchased your home with a Federal Housing Administration (FHA) loan, you may be wondering how to refinance an FHA loan to conventional loan terms. Maybe you’ve improved your credit score, or you’ve built substantial equity in your home or your finances have improved.
In some cases, switching from an FHA loan to a conventional loan could benefit you. Read on to learn if it’s a solution that meets your needs.
Can You Refinance An FHA Loan To A Conventional Loan?
If you meet the minimum requirements for conventional loan approval, you may be able to refinance an FHA loan to conventional loan terms. The refinancing process has similar steps to when you first applied for an FHA mortgage. You’ll have to apply for a new loan and await approval before your loan terms change.
Typically, to qualify for conventional loan approval, you’ll need to meet the following requirements.
- You’ll need a credit score of at least 620.
- Your debt-to-income ratio must be below 50%.
- You’ll need proof of steady income and insurance.
- You’ll need to have at least 3% equity in your home.
- The conventional loan limit can’t exceed $726,200 for a one-family unit.
- You’ll need a loan-to-value ratio of at least 95%.
Different states, counties and lenders will have different requirements and limits for conventional loans. Talk with a mortgage expert to see what the requirements are in your area.
When It Might Be A Good Time To Switch From An FHA Loan To A Conventional
Switching from an FHA loan to a conventional loan could be a good idea if it helps you save money long-term. But even when you meet all the requirements to qualify for a refinance, you’ll still want to evaluate your situation to make sure it makes sense. Some reasons you may choose to refinance from an FHA loan to a conventional loan include:
- You can get a lower interest rate. If conventional mortgage interest rates have lowered since you took out your initial FHA loan, refinancing may help you save over the life of the loan.
- Your credit score has greatly improved since you obtained the FHA loan. Speaking of lower interest rates, if your credit score has increased, it’s possible to qualify for a lower interest rate, as well. A higher credit score could also qualify you for a conventional home loan with better terms compared to your current FHA loan. Plus, improving your credit score typically means you’ve lowered your debt-to-income ratio, which may now qualify you for conventional loan terms.
- You’re in your home for the long haul. Refinancing a mortgage requires closing costs, just like applying for an initial mortgage does. If you plan to stay in or own your home long-term, you may be able to recoup the closing costs of refinancing and save more money over time.
To determine if refinancing makes sense, you’ll want to evaluate your long-term homeownership goals to determine if you can offset the up-front costs with long-term savings.
Advantages Of Refinancing From An FHA To A Conventional Loan
First, consider the pros of refinancing from an FHA loan to a conventional loan.
Lower interest rates
Lower interest rates are generally the biggest benefit of a rate and term refinance. Over the life of a loan, you pay interest each month toward your loan. Over months and years of the loan, you could save substantially in interest costs by lowering your interest rate terms.
Use our mortgage refinancing calculator to see savings potential. This could amount to hundreds of dollars in savings each month and up to tens of thousands of dollars in savings over the life of the loan.
Removing FHA mortgage insurance premiums (MIP)
FHA loans require monthly mortgage insurance premium (MIP) payments. These add to the monthly cost of an FHA loan.
How much you put down in an initial home payment will determine how long you make MIP payments. If you put down less than 10% of the home’s cost in a down payment, you’ll pay MIP payments for the life of the FHA loan.
Conventional loans require private mortgage insurance (PMI) when you’ve put down less than 20% of the home’s cost in a down payment. But unlike MIP payments that you may have to pay for the life of an FHA loan, you can request the removal of PMI from a conventional loan once you’ve achieved 20% equity in your home.
Disadvantages Of Refinancing From An FHA To A Conventional Loan
In some cases, it may make more sense to keep an FHA loan rather than switch to a conventional loan. Consider the following factors.
Refinance closing costs
As mentioned, you’ll have to pay refinancing fees, otherwise known as closing costs. You can expect to pay around 2% to 3% of the loan balance when you refinance. For a loan balance of $250,000, that would amount to $5,000 to $7,500 in closing costs.
Factor in closing costs compared to what your long-term savings would be to consider if refinancing an FHA loan is worth it.
Mortgage insurance
You’ll be able to eliminate MIP payments by refinancing from an FHA loan to a conventional loan, which is a major advantage. However, if your loan balance hasn’t reached 80% of the home’s original value, you’ll need to pay PMI with a conventional home loan.
A credit score impacts PMI amounts, so that will also impact how much you can save or how much you’ll pay overall with a conventional loan.
Redo the mortgage approval process
Refinancing requires going through the mortgage application and approval process again. This takes time and requires steps like a credit check and filling out paperwork. A lender may also require that your home goes through an appraisal process, which can result in additional expenses.
How Soon Can You Refinance FHA To Conventional Loan?
If you’re wondering how soon can I refinance an FHA loan to a conventional, that depends on the lender. As we covered in our post on how often you can refinance your home in Arizona, while there’s no limit to how many times you can refinance a mortgage, most lenders will have a “seasoning requirement” in place.
The seasoning requirement is a required waiting period between applying for one loan and then applying for another. There’s typically at least a 6-month seasoning requirement to refinance a home loan, including switching from an FHA loan to a conventional loan.
Talk To A Mortgage Loan Specialist To Learn More About The Refi Process
When you take action to increase your credit score, lower your debt-to-income ratio and improve your financial standing, you deserve to be rewarded. For those with a mortgage, refinancing can save you potentially hundreds of dollars a month and up to tens of thousands of dollars over the entire mortgage term.
If you currently have an FHA loan but meet the requirements for a conventional loan, it may be worth refinancing so you can eliminate MIP payments and save money over the term of your home loan.
To see if refinancing an FHA loan makes sense for you, talk with a mortgage specialist at Arizona Central Credit Union. We can help you determine if switching from an FHA loan to a conventional mortgage makes financial sense.
