Guide to refinancing an FHA loan to a conventional loan

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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 and, now that you and the loan are maturing, you might think of refinancing — specifically, to a conventional loan (one not insured by the Federal Housing Administration).

Here’s what to think about before making the switch: your guide to refinancing an FHA loan to a conventional loan.

Can you refinance an FHA loan into a conventional loan?

Refinancing from an FHA loan to a conventional loan is quite do-able, so long as you meet the conventional mortgage’s approval standards. It’s a good idea to check ’em out, before you start shopping around for refinance rates.

Requirements to refinance to a conventional loan

These are some of the most common criteria to refinance to a conventional loan:

• A credit score of at least 620
• Equity ratio of at least 20% in your property (that is, you own one-fifth of its market value outright)
• Debt-to-income (DTI) ratio no higher than 45%
• Proof of income and homeowners insurance

How soon can I refinance an FHA loan to a conventional loan?

As long as you meet the lender’s requirements, you can refinance an FHA loan into a conventional loan at any time. However, your state or lender may require the refinance to result in a “net tangible benefit,” like reducing your mortgage payment or shortening your loan term.

“For a rate-and-term refinance — to lower the principal and interest of a mortgage payment, and potentially remove the mortgage insurance portion of the payment — there are really no restrictions as long as a borrower meets or exceeds the net tangible benefit requirements,” says Michael Raffa, a branch manager/VP at Embrace Home Loans in Middletown, R.I.

In contrast, you’d have to wait the better part of a year (210 days after closing) to refinance to another FHA loan.

Why refinance your FHA loan to a conventional loan?

One major benefit of refinancing your FHA loan to a conventional loan is that you can get rid of the annual mortgage insurance premiums (MIP) on your FHA loan. With at least 20 percent equity in a conventional loan, you don’t need to pay for private mortgage insurance (PMI) — the conventional loan equivalent — either.

Getting an attractive interest rate is another major reason to refinance. Hovering north of 7 percent as of June 2024, low rates are hard to find right now. However, it’s worth checking. Compare the market now versus when you applied, and use Bankrate’s refinance calculator to estimate your savings with a lower rate.

You may also be able to get a lower interest rate if your credit score has improved. Let’s say your credit score was 600 when you took out the FHA loan. Four years later, it’s now 670. That’s a huge difference that can help you qualify for a more affordable loan. (If your score has climbed above 700, even better.)

If you don’t have any plans of moving in the future and you still have a long time left on your current loan, a conventional loan refinance can be a smart decision. However, if you’re planning to move in the next couple of years, refinancing might not be wise. That’s because you might not have enough time to hit the break-even point where your savings outweigh the upfront closing costs on a new loan.

Pros and cons of refinancing from FHA to conventional loan

Pros of refinancing your FHA 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. (The only exception is if you made a down payment of 10 percent or more; then the MIP is canceled after 11 years.) Refinancing into a conventional mortgage is the only way to cancel MIP if you put down the usual 3.5 percent.
• You can lower mortgage insurance costs. If you refinance your FHA loan to a conventional loan and still incur mortgage insurance (due to your home equity level), you might find that the premium costs more now than what it cost for your FHA loan. Refinancing, however, could lower your monthly payments enough to compensate, and the tradeoff is that you’ll be able to cancel private mortgage insurance, eventually, on the conventional loan.
• You can convert your home equity into cash. Conventional mortgages allow you to tap up to 80 percent of your home’s equity through a cash-out refinance without paying mortgage insurance.
• You can possibly access larger loan amounts. 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).

Cons of refinancing your FHA loan

While conventional refinance rates tend to be lower than FHA refinance rates, it’s not all roses if you switch. Consider these drawbacks:

• You might still pay mortgage insurance for a while. Those PMI payments will still add up, so be sure to ask a lender for an estimate of how much your premiums would be if you still haven’t hit the 80 percent mark.
• Refinancing isn’t free. Since refinancing is essentially getting a new mortgage, you’ll once again incur closing costs, which — though cheaper than for purchase loans — are still substantial on large mortgages. As of the end of 2021 (the most recent data available), the average refinancing closing costs were $2,398 — an increase of almost 5 percent from the year before — though in some states they can mount as high as $4,600. Depending on your lender, you might be able to roll these costs into your loan, but that will ultimately increase your new monthly payment.
• You’ll have to go through the entire loan process again. Remember all the work you had to do to get approved for your first loan? Get ready to do it again. Conventional refinancing involves a lot of paperwork and back-and-forth exchanges with your lender. The average time to close a conventional refinance loan was 43 days as of May 2024, according to ICE Mortgage Technology.

How to refinance from FHA loan to conventional loan

Step 1: Determine why you want to refinance

To figure out the right type of refinance for your needs, think about your main motivation for refinancing. For example, if you’re hoping to lock in a lower rate or shorten your loan term, then a rate-and-term refinance might be the best option. On the other hand, if you want to borrow against your equity (perhaps for a home improvement project or debt consolidation), then a cash-out refi might be a better fit.

Step 2: Research the same loan type

Once you’ve chosen the type of refinance you’d like, start looking for lenders. If you’re happy with your current lender, contact them and see if they have any refinancing options that fit your needs. But make sure to request quotes from a few other lenders as well to ensure you’re finding the best rates and terms possible.

Step 3: Evaluate loan offers

After submitting a loan application, you’ll receive a mortgage loan estimate within three business days. Take some time to compare your offers, making sure to review each loan’s interest rate and annual percentage rate (APR) and closing costs.

Step 4: Fill out application

Once you’ve chosen a lender, you’ll need to submit your loan paperwork and financial documentation, such as pay stubs and tax returns. You should also prepare for a home appraisal, which many lenders require before closing on a refinance.

Alternatives to refinancing your FHA loan to a conventional loan

If refinancing your FHA loan to a conventional loan isn’t right for you, you can still take advantage of lower interest rates by doing an FHA streamline refinance. This program offers a faster way to refinance your FHA loan because it does away with more stringent underwriting, such as the need to verify your income and credit or do an appraisal.

To qualify for an FHA streamline refinance, you’ll need to meet the following requirements:

• You currently have an FHA loan.
• You’ve been making your payments and your loan is in good standing (not delinquent).
• Refinancing results in a “net tangible benefit,” such as lowering your monthly payment or changing from an adjustable-rate loan to one with a fixed rate.
• You’re not looking to take out more than $500 in equity.
• It has been at least six months since your first mortgage payment.
• It must be at least 210 days from the closing date of the mortgage you’d like to refinance.

Additional reporting by Taylor Freitas