Do you remember when you purchased your home? Did an FHA loan help make it happen? The low down payment and flexible guidelines provided were what was needed to buy a home. Maybe now things have changed a little. Interest rates drop, appraised value increases, more home equity, and better credit scores could all be reasons where a refinance may benefit a homeowner. Even though an FHA streamline refinance could be a possibility, also consider the benefits of a refinance FHA loan to conventional loan. Probably the biggest reason to refinance an FHA loan to a conventional loan would be to reduce or get rid of FHA PMI. Even if the new conventional interest rate is about the same, dropping FHA PMI could make a huge payment difference. Plus, once you realize this overlooked FHA PMI feature, reviewing conventional refinance options will look more attractive.
Refinance FHA Loan Primary Reason
Again, FHA loans provide much help to a large segment of the home buying market. Compared to other home loans, there are several very competitive and beneficial areas. These include interest rate, low down payment, allowing a non occupying co borrower, and very flexible credit guidelines as well as debt to income ratios. To receive a low down payment, FHA loan, borrowers must pay a monthly mortgage insurance fee. Actually, it is also a very competitive amount. Especially, for borrowers with low credit scores as conventional loan mortgage insurance can be high with low scores. Yet, the problem is FHA mortgage insurance continues the entire term on a 30 year fixed FHA loan. That is when the buyer puts down less than 10% down.
Typically, this is not a big deal. Why? Because a large percentage of buyers either sell or refinance in 7 years or less. That may make the cost of a refinance tough to accept. However, if the home appraised value increases enough, then a refinance FHA loan to conventional is worth checking into.
Curious about how long PMI lasts? Click the button below to learn more!
Can You Refinance a FHA Loan to Conventional?
Like all mortgage questions, it depends. Lenders must follow a requirement called a net tangible benefit. Basically, it means the borrower’s benefits must exceed the costs. Benefits could be sufficiently lowering the term, interest rate, and or payment. Although, the borrower needs to also feel good about it. As far as refinancing an FHA loan, options could include conventional, VA, or another FHA loan. A USDA refinance may only pay off another USDA loan. So, a Fannie Mae or Freddie Mac conventional loan is a possible refinance option for FHA loans.
Conventional loans will lend up to 97% of the appraised value. Yes, more than FHA! Therefore, a lot of equity is not required for a conventional refinance. After that, FHA to conventional loan refinance levels are 95%, 90%, 85%, and 80% or less. Benefit chances improve with higher equity. The more equity (same as the lower the percentage of the appraised value), the lower the PMI could be. If the new loan is under 80%, then the borrower could save the whole FHA PMI.
How Do I Know If it Makes Sense for an FHA to Conventional Loan Refinance
The best thing to do is to contact an OVM Financial loan officer. There are several factors to consider and discuss such as:
- Have values gone up?
- How much equity in the home?
- What are the closing costs?
- How much lower is the new payment?
- Comparing FHA streamline vs conventional refinance
Refinance FHA loan benefits could be in your favor. It doesn’t hurt to check!
Cool Options for an FHA to Conventional Refinance
Basically, a 30 year FHA loan has only two options. These include FHA PMI continuing for the entire term or put 10% down for it stop after 11 years. One of the very few areas that FHA is considered limiting. Conventional loans have several options.
Single Premium PMI Conventional Loan
Rather than paying monthly PMI, conventional loans offer the option for paying a set amount up-front. Options could include financing it into the loan, borrower paying with own funds, and/or a lender credit. The benefit is that there is not a monthly amount added to the mortgage payment. Although, a factor to consider is the up-front cost of single premium payment.
Monthly PMI Conventional Loan
Yes, FHA loans already have monthly PMI. But with strong credit scores and hopefully some equity, the monthly mortgage insurance could be lower than the existing FHA PMI. Additionally, a little help from lower interest rates, then it could be a win for the homeowner!
Combine a Conventional Loan and HELOC
Get two loans to replace one? Yes! Combining a conventional loan and a home equity line of credit could provide two solutions. First, it could put the first mortgage under 80% which avoids PMI. Actually, waiving escrows is an additional option if under 80%. Then, as the line of credit is paid down a borrower has access to drawing more funds from the line. Often the payment on the line of credit is pretty low as well.