How to refinance FHA to conventional loan
6 minute read
May 19, 2022


Homeowners who choose the “refinance FHA to conventional loan” route may find significant financial benefits, especially when it comes to their monthly payments.

The first question is: What’s the difference between FHA and conventional loans? And the second question is: Is refinancing from FHA to conventional the best option?

For those looking to answer these and other common concerns about refinancing FHA to conventional loans, AAA Banking has you covered. 

Read on and we’ll show you why it might be a smart financial choice.

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Refinance an FHA mortgage into a conventional loan

Refinancing from an FHA loan to a conventional loan can be an excellent choice for certain borrowers.

If you’re a homeowner who improved your credit score and added equity to your home, you might be able to trim your loan term and lower your interest rate. 

A conventional refinance could easily translate into lower monthly payments—which can put more money in your bank account.

The FHA automatic underwriting system means FHA loans can be processed more quickly with more lenient restrictions when it comes to qualifying. As a result, borrowers with a lower credit score or shorter credit history often find it easier to qualify with FHA loans.

But despite the popularity of FHA loans, many homeowners still opt to refinance to a conventional mortgage. To find out why let’s look at all the benefits of refinancing.

Benefits of a conventional refinance

There are two major benefits to refinancing. 

The first comes with the ability to drop your FHA mortgage insurance premiums (MIP), and the second is the chance to improve your interest rate.

Let’s break these two benefits down into greater detail.

FHA mortgage insurance premiums (MIP)

Anyone approved for an FHA loan must pay the FHA mortgage insurance premium (MIP), regardless of how much of a downpayment they use. Plus, there are two payments in total. 

First, the upfront MIP you pay at closing, plus an additional annual payment. That additional payment is broken down and included with your monthly mortgage payment.

How long an FHA mortgage loan borrower will pay the MIP will depend on the downpayment amount.

  • A downpayment of at least 10% will mean the MIP is included for 11 years.
  • A downpayment of less than 10% will mean MIP is included for the life of the loan.

This situation is similar to the conventional loan requirement of private mortgage insurance (PMI), but with one significant difference.

PMI is added to monthly mortgage payments for real estate buyers who use less than 20% for a downpayment. However, unlike an FHA loan, you can drop your conventional loan PMI once you have enough equity. 

If you have built up 20% home equity, you can contact your lender to ask them to remove PMI. Alternatively, you could wait until about 22%, when it usually cancels automatically .

However, refinancing FHA to conventional loans removes that MIP fee from your monthly payment right away.

A lower interest rate

Get a rate

You get a new interest rate on your mortgage that could save you significant money when you refinance your FHA loan.

Conventional loan interest rates are generally slightly higher than Federal Housing Administration rates. But a possible workaround for that problem is to refinance when interest rates are lower than when you first got your loan. This will also depend on your individual credit score and financial health. 

That better rate could save you thousands since you’re paying interest during the entire home loan.

On the flipside: Cons of refinancing FHA to conventional 

To pursue a refinance from FHA to a conventional mortgage is a big decision, and should not be taken lightly.Before you choose to refinance your home loan, you should know what extra costs are involved.

Closing costs

Closing costs are included with any refinancing option, averaging about two to three percent of the loan balance.

A vital calculation to perform is to check what money you might save on interest rates and FHA mortgage insurance elimination for the life of the loan. Then, compare that to the one-time charge of closing costs to see whether it saves money.

Some lenders will allow you to roll closing costs into the overall mortgage. This eliminates your out-of-pocket expenses at the time of closing.

The lender approval process

Unfortunately, the process of refinancing a home loan does not happen overnight.

Even though you’ve already gone through the approval process when you applied for your current mortgage, you’ll have to navigate the process again when refinancing any loan type.

Mortgage refinance can include checking credit score requirements, submitting documents, and having another appraisal to assess the home’s value.

The documents you’ll likely have to provide can include:

  • Recent pay stubs
  • A copy of your homeowner’s insurance policy
  • W-2s, 1099s, tax returns
  • And a copy of your title insurance

What do I need to qualify for a conventional refinance?

Find out if you qualify

The general minimum lender requirements you need for refinancing with a conventional mortgage include:

  • A minimum credit report score of 620
  • A maximum debt-to-income ratio (DTI) of 43%
  • Proof of income
  • Your homeowner’s insurance verification
  • An appraisal to calculate the home’s value and determine loan-to-value—to make sure your home loan is not for more than the value of the home itself.

Refinance FHA to conventional loan—conclusion

As we’ve shown, refinancing FHA to conventional loans can have significant benefits for homeowners compared to their current loan. 

From a lower interest rate to dropping your MIP, you could see substantial savings by refinancing.If you’re looking to save money on your primary residence, AAA Banking can be much more than just a convenient way to refinance.

We strive to be a supportive, knowledgeable partner who will always be there when you need us. More than just a bank, we care about your emotional well-being and financial health.If you want to save money and look to start a beneficial relationship with a better bank, contact our licensed loan officers today. Conversations are free, and they could lead to the best financial partnership you’ve ever had.

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