Can I Refinance From an FHA Loan to a Conventional Loan?
FHA loans are incredibly popular among first-time homebuyers, as their low down payments and lax credit requirements can make getting a mortgage much more affordable. After purchasing a home, however, many borrowers feel burdened by their FHA loan and look to refinance. Mortgage insurance fees associated with FHA loans can quickly become very costly. The FHA requires that borrowers pay two different insurance premiums: an upfront mortgage insurance premium — a one-time payment that equals approximately 1.75% of the loan’s principal balance and is paid at closing — and a monthly mortgage insurance payment. While the low interest rates for FHA loans may be attractive to first-time home buyers, these insurance fees can add up to $500 to a borrower’s monthly mortgage payment. Because of this, homeowners with FHA loans may be wondering if there’s anything they can do to reduce their monthly payments and save money in the long-run. Luckily, refinancing to a conventional loan allows borrowers to do just that.
Refinancing From an FHA Loan to a Conventional Loan: What to Know
As home values continue to rise, many borrowers find that they have more equity in their home. This increased equity is largely what makes it possible to refinance from an FHA loan to a conventional loan. Conventional loans may have stricter credit requirements or require borrowers to provide more financial documents and disclosures to lenders, but switching from an FHA loan to a conventional loan can result in significant savings. As previously detailed, many borrowers with FHA loans struggle under the weight of the added monthly mortgage insurance costs, but with a conventional loan, all mortgage insurance requirements are canceled, so long as the homeowner has a 78% loan-to-value (LTV) ratio on their home. Although conventional loans typically have higher interest rates, borrowers are also able to take out larger loans through refinancing to a conventional mortgage. While there may also be high closing costs associated with a refinance, these are often worth it, given the benefits of switching from an FHA loan to conventional loan.
So, how can you refinance from an FHA loan to a conventional loan?
Before you consider refinancing, you should find out how much equity you have on your home to verify that you meet the 78% loan-to-value requirement. Additionally, you should conduct what is known as a break-even analysis. Although refinancing from an FHA loan to a conventional loan offers great potential for savings, that might not always be the case. By conducting a break-even analysis, you can chart how much money you stand to save (or lose) over time by moving ahead and refinancing. You should also seek the approval of the FHA, even if you’re not switching to a different lender. Overall, refinancing from an FHA loan to a conventional loan is the same as a normal refinance.
- Firstly, do some research about qualified mortgage lenders in the region and make a short list of about 5 or 6. Ask each one to provide you with a good faith estimate (GFE) and a quote for the refinance. Be sure to inform them that you want to convert from an FHA loan to a conventional loan.
- Compare each lender’s offer by using the “shopping cart,” located on page 3 of the GFE. Additionally, determine which loan type is best for you based on how long you will live in the house and your ability to afford the monthly payments.
- Decide upon a lender and move forward with them in applying to refinance. Provide them with all the necessary documents, including things like pay stubs, income tax returns, recent statements from personal assets, and credit reports. You may also be asked to verify your identity with a copy of your social security card, passport, or birth certificate.
- Contact a home appraiser about conducting a home appraisal. Once the appraisal is complete, get the appraisal report to your lender as quickly as possible.
- Attend the closing process and sign the final documents. You will be permanently locked-in at the rate detailed on the final closing disclosure unless you choose to refinance again at a later time.
The whole process of refinancing usually takes about several weeks to complete. If your loan-to-value ratio is greater than 80 percent of the home’s value, one option to consider using is the streamline refinance option. This refinancing option is faster, requires far less documentation, and can even offer you a lower rate than traditional refinancing can offer.
And remember, when trying to decide what kind of refinance loan is best for you, make sure to keep an eye on trends in home prices and mortgage rates, so as to weigh all of your options.