Refinancing from FHA Loan to Conventional Utah Mortgage

There are several forms of mortgage refinancing that homeowners might consider depending on their situation and their financial needs, and one of these involves converting from one loan program to another that might be more beneficial. One example here is a refinance from the FHA loan program into a conventional loan -- why is this done, and why might it be something you should consider if your current mortgage is within the FHA program?

At Integrity First Lending, we're happy to assist Utah clients with a wide range of mortgage refinancing needs, including conventional mortgage refinancing for several different situations. Why is the refinance from FHA to a conventional loan sometimes carried out, what are the potential pros and cons of this move for you, and what alternatives are out there if this isn't the proper decision for your situation? Let's go over everything you need to know.

Differences Between FHA and Conventional Loans

First and foremost, let's quickly go over how FHA and conventional loans differ. Here's a primer on each:

• Conventional loans: The most common type of home loan in the United States, these are offered by a wide range of lenders and have a number of benefits. Conventional loans are more flexible than FHA loans, for example -- whereas they are limited to no more than 96.5% of the purchase price when it comes to financing in most cases, they are not restricted by area but instead have limits that depend on loan size and other factors.
• FHA loans: Offered by the Federal Housing Authority (FHA), these loans have a variety of benefits and some drawbacks, including some eligibility criteria that may not be as lenient as conventional programs. FHA loans also cap the amount of money allowed for financing at just 97.75% of the purchase price, but this is often high enough to more than accommodate most borrowers.

Why FHA to Conventional Refinancing is Done

Generally, you'll be eligible to refinance an FHA loan to a conventional one if you meet the minimum requirements for the latter, which typically require a credit score of at least 620. The most common reason for doing so is to take advantage of a more competitive interest rate that is often available with conventional refinancing. Whether this makes sense for your specific situation will depend on factors like your credit score and interest rate, but it certainly could be beneficial to explore if you're able to do so (and if the refinance doesn't come with any other negative aspects).

Refinancing an FHA loan to a conventional one is also sometimes carried out to avoid the mandatory MIP associated with FHA loans (MIP, or mortgage insurance premium, is a monthly fee of up to 1.35% that protects lenders against defaults). Going from an FHA loan to a conventional loan means this fee will no longer be required, and can easily save borrowers several hundred dollars a year.

In addition, refinancing to a conventional loan allows you the potential to utilize what's known as a cash-out refinance. This doesn't mean that you will necessarily be able to receive all cash but instead refers to the fact that you may be able to use part of your home's equity for other purposes, which might include any number of financial goals. Cash-out refinancing makes this much more difficult, as it requires private mortgage insurance payments.

Possible Drawbacks of Refinancing From FHA to Conventional

Now, it should be noted that this form of refinancing isn't right for everyone -- and we'd never recommend it if it won't benefit you. The most common possible drawback is a situation where the closing costs and other fees involved in the refinancing process actually add up to more than the monthly savings from dropping your MIP -- in this case, it doesn't make sense to go through with the move.

In addition, refinancing from an FHA loan could come with a higher interest rate than you currently have. In some cases, it might be better to simply pay off the MIP if possible and remain on the same loan.

Finally, there's another factor to take into consideration: What do you plan to do when it comes time for renewal?  When an FHA loan is up for renewal, the borrower will either have the option of dropping their MIP or converting back to an FHA-insured loan in most cases. If this is your chosen course of action, refinancing to a conventional loan will mean you've wasted your time and money.

Alternative Available

If you've done your research and found that you would not profit from refinancing your FHA loan to conventional, don't give up just yet! You may have another option, one known as FHA streamline refinancing. This program involves less stringent underwriting, and thus your credit and employment history may not play as much of a role in determining whether you're approved.

These are the requirements that must be met to qualify for FHA streamline refinance:

• You've made on-time mortgage payments for your FHA loan for each of the last six months
• It's been at least six months since your first payment was due, and at least 210 days since closing your original loan
• Refinancing results in a "net tangible benefit" to you, such as lowering your monthly payment
• You are not performing any kind of cash-out refinance
• You're able to continue paying mortgage insurance

At Integrity First Lending, we're happy to assist Utah clients with a variety of mortgage and refinancing needs. If you're unsure whether either of these forms of FHA loan refinancing are right for you, contact our loan officers today for assistance.