If you can avoid paying expensive monthly mortgage insurance and have enough equity in your home, it makes sense to refinance an FHA loan to a conventional loan. But before you convert your FHA loan into a conventional mortgage, you’ll need to see if you can meet the stricter qualifying requirements.
Are you wondering if you can switch from an FHA loan to a conventional loan? The answer is yes, you can! In fact, many homeowners do just that once they’ve built equity in their homes and improved their credit score.
This guide will answer all your questions about switching from an FHA loan to a conventional loan including:
- Eligibility requirements
- Benefits and drawbacks
- Alternatives to consider
- Steps to take
Eligibility Requirements
To switch from an FHA loan to a conventional loan, you must meet the following requirements:
- Credit score: You need a minimum credit score of 620 to qualify for a conventional loan. The higher your credit score, the better terms you’ll get.
- Debt-to-income ratio (DTI): Your DTI measures your monthly debts against your gross monthly income. Conventional loans allow a DTI of up to 50%.
- Equity: You need at least 5% – 25% equity in your home to qualify for a conventional loan. The more equity you have, the better.
- Proof of home’s value: You’ll need to get a new appraisal when you refinance.
- No outstanding liens: Your title must not show any outstanding property liens.
Benefits of Switching from FHA to Conventional
There are several benefits to switching from an FHA loan to a conventional loan, including:
- Eliminate mortgage insurance: FHA loans require mortgage insurance, which can add hundreds of dollars to your monthly payment. Conventional loans don’t require mortgage insurance if you have at least 20% equity in your home.
- Lower interest rates: Conventional loans often have lower interest rates than FHA loans, which can save you thousands of dollars over the life of your loan.
- More flexible terms: Conventional loans offer more flexible terms than FHA loans, such as shorter loan terms and the ability to make larger down payments.
- Build equity faster: With a lower interest rate and no mortgage insurance, you’ll build equity in your home faster with a conventional loan.
Drawbacks of Switching from FHA to Conventional
A few disadvantages should be taken into account prior to converting from an FHA loan to a conventional loan:
- Higher credit score requirement: Conventional loans require a higher credit score than FHA loans.
- Higher down payment requirement: Conventional loans typically require a higher down payment than FHA loans.
- Closing costs: You’ll have to pay closing costs when you refinance.
Alternatives to Consider
In case you are not eligible for a traditional loan, you may want to think about the following alternatives:
- FHA Streamline Refinance: This is a type of refinance that allows you to lower your interest rate or shorten your loan term without having to meet the same income and credit requirements as a conventional loan.
- VA Loan: If you’re a veteran, you may be eligible for a VA loan, which doesn’t require a down payment or mortgage insurance.
- USDA Loan: If you live in a rural area, you may be eligible for a USDA loan, which also doesn’t require a down payment or mortgage insurance.
Steps to Take
If you’re interested in switching from an FHA loan to a conventional loan, here are the steps to take:
- Check your credit score: Make sure you have a credit score of at least 620.
- Calculate your equity: Determine how much equity you have in your home.
- Shop around for lenders: Compare interest rates and terms from different lenders.
- Get pre-approved: Get pre-approved for a conventional loan so you know how much you can borrow.
- Gather your documents: Gather the necessary documents, such as your tax returns, pay stubs, and bank statements.
- Apply for a loan: Apply for a conventional loan with the lender of your choice.
- Close on your loan: Once your loan is approved, you’ll need to close on it.
Switching from an FHA loan to a conventional loan can be a great way to save money on your mortgage and build equity faster. However, it’s important to make sure you meet the eligibility requirements and understand the benefits and drawbacks before you make a decision.
Additional Resources
- Quicken Loans: Refinance FHA to Conventional
- LendingTree: Refinance Your FHA Loan to a Conventional Loan
- FHA Streamline Refinance
- VA Loan
- USDA Loan
Disclaimer: I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for any financial decisions.
Pros and cons of refinancing from FHA to conventional
You may get rid of mortgage insurance. One possible benefit of refinancing from an FHA loan to a conventional loan is the potential to remove the monthly mortgage insurance. Conventional loans don’t require mortgage insurance if you have at least 20% equity in your home. You won’t pay lifetime FHA mortgage insurance. A disadvantage of obtaining FHA financing with a minimal down payment is having to pay FHA mortgage insurance on a monthly basis for the duration of the loan. When you take out a conventional loan, you will be required to pay private mortgage insurance (PMI) if you do not have equity in 2020. However, PMI will automatically be deducted once you have paid the remaining balance on your loan down to 2078 percent of the original purchase price. You have the option to request a cancellation of PMI if you have made additional payments to bring your loan balance down to 80% of the original value of your home.
You can tap equity and avoid paying mortgage insurance again. You can borrow up to 80% of your home’s value with both an FHA and conventional cash-out refinance. However, unlike an FHA cash-out refinance loan, a conventional cash-out loan doesn’t require any mortgage insurance.
You can borrow a higher loan amount than FHA loan limits allow. In most of the country, the conventional conforming loan limit for a single-family home as of 2023 is $726,200. The FHA loan limit is capped at $472,030 for one-unit homes in most U. S. counties.
You may not qualify if your credit scores haven’t improved. Conventional loans can’t be approved without a minimum 620 credit score.
You’ll pay higher PMI with lower credit scores. Unlike FHA mortgage insurance, conventional PMI premiums are impacted by your credit scores.
Your DTI ratio needs to be lower. You might not be eligible for a conventional loan if you have a lot of revolving debt or non-mortgage loans.
You’ll pay a higher interest rate. Conventional interest rates are higher than FHA mortgage rates. When comparing options, make sure to look at the annual percentage rate (APR) for each; FHA APRs are typically higher due to the high cost of the mortgage insurance you must pay.
You won’t have access to any streamline refinance options. You can qualify for better terms or a lower rate with the FHA streamline without having to provide proof of income or have your house appraised. While you might get an appraisal waiver on a conventional refinance, you’ll have to document your income.
You may not qualify with a recent foreclosure or bankruptcy. To be eligible for a conventional loan, you have to have gone at least seven years without a foreclosure and four years without a bankruptcy. That’s significantly longer than the three-year foreclosure or two-year bankruptcy waiting requirement for FHA loans.
Can you refinance an FHA loan to a conventional loan?
Yes, as long as you qualify. In 2023, you’ll need an even higher credit score and lower debt-to-income (DTI) ratio to get the best rate on a conventional loan versus one backed by the Federal Housing Administration (FHA). That’s due to changes in fees that will affect conventional loans after May 2023. Watch for the
You may qualify to refinance an FHA loan to a conventional loan if:
- Your credit score is higher. For conventional financing, you must have a minimum credit score of 620 (as opposed to 500 for an FHA loan). Your 740 credit score used to get you the best conventional interest rates; however, starting in May, when the conventional loan fee adjustments take effect, you’ll need a score of 780 or higher.
- You’ve paid off a lot of debt. Conventional lenders would rather that your monthly debt payments account for 25% or less of your total income. A conventional mortgage can be an option for you if you’ve paid off credit card debt or a high-balance auto loan. A debt-to-income ratio of more than 20% will be accompanied by an additional expense that could raise your closing costs or standard interest rate after August. 1, 2023.
- You don’t need a co-borrower anymore. If your income has increased since purchasing your house, you might be able to discharge a parent or relative who cosigned to support your eligibility for an FHA loan.
- Your spouse has racked up extra debt. Your spouse’s debt is counted against you with an FHA loan if you reside in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), regardless of whether they are on the loan. No matter where you live, you can refinance a conventional loan and leave your spouse’s debt behind.
If you have an FHA mortgage, you may want to switch to a Conventional | Homespire Mortgage
FAQ
When can I switch from FHA to conventional?
Is conventional better than FHA?
What credit score do you need to refinance from FHA to conventional?
Why do realtors prefer conventional loans over FHA loans?
Can you refinance an FHA loan?
You must also meet seasoning requirements to refinance your FHA loan, which include having your loan for 210 days. With its lenient down payment and credit score requirements, an FHA loan can be an ideal starter mortgage, but the steep fees that accompany FHA loans add up.
Should you switch from an FHA to a conventional loan?
Switching from an FHA to a conventional loan comes with a host of benefits. Here’s a closer look: You can get rid of FHA mortgage insurance. In most cases, for an FHA loan originated after 2013, you have to pay mortgage insurance premiums (MIP) on FHA loans for the loan’s lifetime.
Can I refinance an FHA loan to a conventional loan?
You can refinance an FHA loan to a conventional loan when you meet the seasoning requirements. These include the following: You must have made six payments on your FHA loan. It has been at least six months since your first mortgage payment. It must be at least 210 days since the closing date of your loan.
What is the difference between a conventional and FHA loan?
Conventional loans also have higher loan limits, so you can take out a larger amount compared to an FHA loan. The 2024 FHA mortgage limit for single-unit properties is $498,257, a fraction of the $766,550 limit for conventional loans. (This figure increases to $1,149,825 for homes in high-cost areas).