You can refinance an FHA loan by converting it to a traditional mortgage or changing the rate or terms.
Thinking about refinancing an FHA loan to a conventional mortgage loan? While doing so has benefits, it’s not the best choice for everyone. Most homeowners refinance FHA loans to a conventional loan, which offers benefits like getting rid of mortgage insurance premiums. Just like a regular mortgage, you can adjust an FHA loan's rate or terms.
Let’s look at a few reasons why you might want to refinance and what the process looks like.
- Should You Refinance Your FHA Loan?
- Pros
- Cons
- See All 8 Items
Should You Refinance Your FHA Loan?
Reed Letson, owner of Elevation Mortgage, says refinancing an FHA loan to a regular home loan can be very beneficial. “FHA, under a majority of circumstances, requires that you carry mortgage insurance for the life of the loan, whereas a conventional loan will not require it once your loan-to-value goes below 80%,” he says. “For example, if your home is worth $500,000 and you owe $300,000, your loan-to-value would be 60%, allowing you to be eligible to eliminate your mortgage insurance.”
Some FHA loans can also undergo a rate-and-term refinance, though it doesn’t work the same as a traditional mortgage refinance. “Unlike conventional loans, not all of the closing costs can be rolled into the loan, so you will be subject to bringing cash to closing,” Letson says. “Secondly, you will still be required to carry mortgage insurance no matter how low your loan-to-value is.”
Pros
- Allows you to lock in a lower interest rate
- May allow you to get rid of private mortgage insurance
- You can tap into home equity
Cons
- Need at least 20% equity
- Closing costs can’t be rolled into the new loan
How to Refinance Your FHA Loan
When you apply for a refinance, you must meet your lender’s requirements. Let’s look at some of the requirements you’ll need to meet before refinancing.
- Credit score: You’ll usually need a 620 credit score or higher to qualify for a refinance to a home loan but only a 580 score to refinance the terms of your FHA loan. See our full guide to credit scores needed to refinance a home loan to learn more.
- DTI ratio: You typically need a DTI ratio of less than or equal to 50% to qualify for a refinance.
- Equity: You must have at least 20% equity in your property to avoid paying for PMI when refinancing.
- Home appraisal: Like when you bought your home, you’ll usually need an independent appraisal when you apply for a refinance. This assures your lender that the value of your home hasn’t significantly decreased in the years since you bought your house.
- Closing costs: Expect to pay about 2% to 6% of your loan value in closing costs.
You’ll also need to provide your lender with financial documents when you apply for a loan. Some of the information you may need to show your lender includes:
- Your two most recent bank statements
- Your last two W-2 forms
- Your last two pay stubs
- A credit report
The specific process you’ll go through when you apply for a refinance will depend on your lender.
What to Know About Refinancing an FHA Loan
“If you are considering refinancing your FHA loan, consult with a local mortgage broker who has experience with FHA loans, as they will be able to guide you to make the best decision for your unique scenario,” Letson says.
- Refinancing an FHA loan to a conventional loan may allow you to get rid of private mortgage insurance
- You’ll still need PMI if you do a rate-and-term refinance on an FHA loan
- If you’re switching to a conventional loan, you’ll need to undergo another home appraisal
RELATED: Benefits of Refinancing
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Reed Letson, a mortgage broker and owner of Elevation Mortgage in Colorado.
Frequently Asked Questions
Can you refinance a FHA loan?
Yes, you can refinance an FHA loan by converting it to a conventional mortgage or adjusting the rate or term of your government-backed loan.
What is the waiting period for a FHA refinance?
The waiting period for an FHA refinance is generally about six months from when you first closed on your mortgage.
How much does it cost to refinance a FHA loan?
You must pay 2% to 6% of your total loan size to refinance an FHA loan. If converting it to a traditional mortgage, those costs may be rolled into your new home loan.
Sources
- Reed Letson, mortgage broker and owner of Elevation Mortgage in Colorado.
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.
