We get it; we totally understand the frustration of paying high monthly mortgage insurance premiums. So if you’re looking for some flexibility, here is a solution – switching from an FHA loan to a conventional loan.
This change can potentially save you money on mortgage insurance premiums with lower interest rates. Where do you start? No need to stress – we’ve got your back!
We’ll explore in this article everything you need to know about pivoting from an FHA loan to a conventional loan and how you can make the switch today!
Ready to save some money? Let’s deep-dive.
What Are Conventional Loans?
We assume you already know what FHA loans are. If not, they are a type of government-backed loan with very lenient eligibility criteria, including low credit and down payment requirements. These requirements also determine how much you qualify for.
However, their Mortgage Insurance Premiums (MIPs) and interest rate can pile up your monthly mortgage payment over time.
Conventional loans, on the other hand, aren’t government-backed and are offered by private lenders such as banks, credit unions, or mortgage companies.
As a result, they have stricter eligibility criteria, including higher credit score requirements and larger down payment requirements.
Unlike the FHA loan, conventional loans only require a PMI if you put down less than 20% on the home.
Can I Refinance My FHA Loan to a Conventional Loan?
Yes, you can refinance your FHA loan into a conventional loan.
This is beneficial for borrowers who have improved their credit score, built up equity in their home, or want to eliminate mortgage insurance premiums (MIP) that are required on FHA loans for the life of the loan.
But first, it’s important to understand the key differences between these two types of loans.
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Down Payment | As low as 3.5% | 5% to 20% |
| Credit Score | Minimum of 580 | 640 or higher |
| Mortgage Insurance | Required for the life of the loan | Optional with a 20% down payment |
| Interest Rates | Typically higher | Typically lower |
| Loan Limits | Varies by location | Higher than FHA limits |
| Property Type | Can finance a variety of properties, including condos and multi-unit homes | May have restrictions on property type |
| Requirements | Limited to primary residences | Can finance primary, second, and investment properties |
If you’re thinking of moving from an FHA loan to a conventional loan, take some time to do your homework and make sure it’s the best option for your financial situation.
The process of making the switch usually involves refinancing and several other steps. We’ll discuss them to give you a better understanding of what to expect.
Check Your Equity
The first step is figuring out how much equity you have in your home. Keep in mind that you’ll need at least 20% equity to avoid paying for private mortgage insurance (PMI).
If you don’t have 20% equity in your home, you may still be able to switch to a conventional loan, but you will have to pay for PMI, which can add a significant cost to your monthly mortgage payment.
To check your equity, you can use the following formula:
(Current home value - outstanding loan balance) / current home value
For example, if your current home value is $250,000 and your outstanding loan balance is $200,000, your equity is 20%:
($250,000 - $200,000) / $250,000 = 0.2 or 20%
Check Your Credit Score
Now, let’s talk about your credit score.
It’s an essential factor when switching from an FHA loan to a conventional loan. Unlike FHA loan credit requirements, conventional loans require a higher credit score.
So, before applying for a conventional loan, it’s crucial to ensure that your credit score is in good shape. A higher credit score can also help you snag a lower interest rate, which can ultimately save you loads of money over time.
When considering a conventional loan, it’s important to keep in mind that a credit score of at least 640 is typically required.
However, some lenders may have higher requirements, so it’s essential to do your research and shop around to find the best rates that match your credit score.
Find a Lender
With your equity and credit score in check, the next step is to find a lender that provides conventional loans.
Don’t worry, it’s easier than it sounds!
It’s important to be thorough when shopping for lenders, comparing rates and terms to find the best deal for you. For properties in any of our service areas, give us a call.
The refinancing process can be as smooth as possible providing you gather all necessary documents in advance and respond promptly to your lender’s requests.
Keep in mind that your lender will also order an appraisal of your home to determine its current value.
It may seem like a lot of work, but it’s all worth it in the end when you start saving money on your monthly payments.
Calculate Your Savings
Before you switch from an FHA loan to a conventional loan, it’s a good idea to calculate how much money you could potentially save.
Using an online mortgage calculator, you can compare the monthly payments and total costs of both types of loans.
Keep in mind that while a conventional loan may save you money on mortgage insurance premiums, unlike the FHA down payment requirements, it may require higher down payments and closing costs.
Crunching the numbers ahead of time can help you make an informed decision about whether switching to a conventional loan is the right move for you.
To calculate your savings, you should consider the following factors:
- Mortgage insurance premiums
- Interest rates
- Monthly payments
- Closing costs
Apply for the New Loan
When you’ve gone through the previous steps, it’s time to apply for a new loan.
Once your loan application and documentation are submitted, the lender will evaluate your eligibility based on your credit score, financial history, and other factors.
If you meet the requirements for a conventional loan, you must complete the loan closing process and pay the associated costs.
It’s essential to note that transitioning from an FHA loan to a conventional loan may not be the right option for everyone. Although it may reduce mortgage insurance premiums, it could also necessitate a larger down payment and higher closing costs.
As a result, it’s crucial to compare the benefits and drawbacks of each loan type and consider your financial objectives and circumstances before making a decision.
As a side note, the FHA also offers refinancing and loan variations like the FHA 203k loans that can be helpful to your current financial situation. Be sure to evaluate all your options before choosing which is the more ideal fit.
Frequently Asked Questions
Is there a waiting period before I can switch from an FHA loan to a conventional loan?
It’s important to note that there is no specific waiting period required. However, your lender may have their guidelines and requirements for when you can make the switch.
Before refinancing an FHA loan to a conventional loan, it’s important to note that you may need to wait at least 210 days and fulfill specific waiting period requirements set by your lender.
Some lenders may require a certain number of payments on the FHA loan before approval for the switch. To ensure a smooth transition, speak with your lender and obtain all necessary details.
Can I switch from an FHA loan to a conventional loan if I have an underwater mortgage?
If you have an underwater mortgage and want to switch from an FHA loan to a conventional loan, it’s not impossible, but it can be challenging.
Getting a conventional loan can be challenging if you owe more on your home than its current value, as most lenders require a loan-to-value (LTV) ratio of 96.5% or less.
However, don’t lose hope yet! Some lenders may consider your good credit history and ability to make timely payments as qualifying factors.
Will I need a new appraisal when switching from an FHA loan to a conventional loan?
Yes, you will likely need to get a new appraisal.
FHA loans require an appraisal to determine the fair market value of the home, and the appraisal is typically valid for 120 days. If you are switching to a conventional loan more than 120 days after your last appraisal, you will need to get a new appraisal.
Your lender may also require additional documentation, such as proof of income, employment history, and credit history. It’s important to work closely with your lender to understand their specific requirements and ensure a smooth transition.
To Wrap Up
Congratulations on taking the time to educate yourself on the benefits of refinancing from an FHA loan to a conventional loan and how to potentially lower your interest rate and gain more flexibility in your monthly payments.
But remember, it’s important to carefully evaluate your financial situation and work with a reputable lender to determine if switching loans is the right move for you. Consider your long-term goals and weigh the pros and cons of each loan option before making any decisions.
Luckily, we can help guide you through the process and find the best rates and terms for your financial situation. So, don’t hesitate to give us a call for advice and answers to your questions.
