Refinancing an FHA loan to a conventional loan

Quick insights

• Refinancingec-refinance-hl000061 your FHA (Federal Housing Administration) loan into a conventional loan may provide you with a better rate and terms, in addition to potentially ending mortgage insurance requirements.
• Better terms aren’t guaranteed, and the cost of refinancing may offset the potential financial advantages.
• Applying for a refinance is similar to getting a first mortgage, from providing current financial documents to a new home appraisal and more.

FHA loans are government-backed mortgages that can make it easier for low- and moderate-income borrowers to become homeowners. However, once you’ve had your FHA loan for a while, you may want to explore the refinancing process. There are a few financial reasons you may want to refinance—for example, shortening your loan term or saving on annual mortgage insurance premiums (MIP).

In this article, using the differences between FHA and conventional loans, we’ll review the refinancing process. We’ll also provide an overview of some of the pros and cons of refinancing an FHA loan to a conventional loan, in particular.

Eligibility criteria for refinancing to a conventional loan

When you refinance your existing FHA loan to a conventional loan, you will essentially go through a new loan approval process. However, if you’re making the change from an FHA loan, you may find that the new requirements are stricter than they were for your original loan. Approval criteria for a conventional loan vary by lender; however, you may want prepare for stricter requirements, including a certain amount of equity, debt-to-income ratio and credit score requirement (often 620 or more).

The pros and cons of refinancing to a conventional loan

For some, an FHA loan may be the only way to buy their first home. But after some time, the same homeowner may see certain benefits to refinancing to a conventional loan. This may be especially true for someone who has undergone meaningful improvements in their financial profile, such as improving their credit score or income.

Potential benefits of refinancing from an FHA to a conventional loan

Is it worth refinancing an FHA loan to a conventional loan? Adjusting to a loan with a different interest rate, removing MIP and different terms may result in immediate or long-term financial benefits: :

• Removal of MIP: Transitioning to a conventional loan may remove mortgage insurance payments from your monthly costs. MIP may fall off automatically with your FHA loan depending on certain factors (including when you received your mortgage), but refinancing may provide another way to remove MIP.
• Potential interest rate reductions: If the market conditions are right and you have a strong credit score, it’s possible that you may be approved for a conventional home loan with a better rate than your existing FHA loan.
• Cash option: A cash-out refinance from an FHA loan to a conventional loan could give you cash at the end of the process. Basically, you borrow more than you owe on your current FHA mortgage with the conventional mortgage, providing you the difference in cash, 

Potential risks and considerations of refinancing to a conventional loan

When it comes to refinancing a home loan, the grass may not be greener on the other side. You may want to keep these aspects in mind as you explore your options:

• Refinancing costs: Much like getting a first mortgage, refinancing comes with steps and costs that can begin to offset financial benefits. This process can include application fees, appraisal fees and closing costs for your new loan.
• Market impact: Depending on current market conditions, a new appraisal could result in a lower evaluation of your home. It’s also possible that interest rates will be higher than they were when you received your initial loan, which may prevent you from reducing costs with a refinance.
• Impact on credit score: Applying for a new loan generally initiates a hard credit check, which can temporarily impact your credit score.

How to refinance an FHA loan to a conventional loan

If you’re ready to move forward with refinancing, here are some key steps of the process:

Step 1: Assess your financial situation

Start by refamiliarizing yourself with your current mortgage terms and interest rate. You may also want to gather figures relating to your monthly costs and savings, these will be important as you begin comparing rates and terms for new loans. As a note, your loan will need to be current and in good standing to refinance.

Step 2: Compare lenders and offers

As you begin researching different lenders for a new loan, compare their rates, terms and reputation. You may want to request quotes from multiple lenders who stand out to you for a more thorough comparison.

Step 3: The application process

To move forward with an application, you will generally need to provide documents regarding your personal finances, including proof of income, a credit report and proof of homeowners insurance. Your home is also likely to be appraised as part of the process to confirm its value for the new loan.

Step 4: Closing the deal

Just like with your first mortgage, the closing process includes reviewing a closing disclosure (provided at least three days prior to closing). Any upfront costs will also be due as the refinance process concludes.

In conclusion

Converting your FHA loan to a conventional loan by refinancing may allow you to gain a more favorable rate, while also removing the MIP requirement. However, financial benefits are not guaranteed; your new loan’s terms depend on the lender, your property details, personal finances and broader market conditions. With a refinance, you will also need to pay certain closing costs in cash. For more information relating to refinancing an FHA loan, consider reaching out to a Chase Home Lending Advisor who can assist you.