There is no waiting period for borrowers who want to refinance an FHA loan and switch to a conventional loan. But that doesn’t mean it’s automatically a good idea. When you refinance a mortgage, you want to benefit — maybe enjoy lower monthly payments, or perhaps save money on interest over the loan term.
To decide whether or not to refinance, it first helps to understand the difference between an FHA loan and a conventional mortgage. An FHA loan is a home loan backed by the Federal Housing Administration. The FHA doesn’t directly loan to borrowers; instead, it insures loans for lenders to alleviate some of the risk the lender takes on when lending money. Borrowers can usually meet FHA loan requirements with a lower credit score, and can provide a lower down payment than would be necessary with some conventional loans. For this reason, FHA loans are popular with first-time homebuyers.
A conventional loan, on the other hand, is a home mortgage loan not backed by the federal government. Borrowers with less-than-stellar credit ratings or minimal down payments aren’t always able to get a conventional loan. Or if they do, a conventional loan might have a higher interest rate than an FHA loan.
You don’t have to wait to make the switch from FHA loan to conventional. But why would you want to refinance, should you do it, and what are the pros and cons? Let’s have a look at these questions.
Can You Refinance an FHA Loan to a Conventional Loan?
Yes, you can refinance an FHA loan to a conventional loan. However, a lender won’t just approve you for a refinance immediately. If you currently have an FHA loan, you must qualify to refinance to a conventional loan.
Why Should You Refinance From an FHA to a Conventional Loan?
One reason you might refinance from an FHA to a conventional loan is that FHA loans require you to pay a mortgage insurance premium (MIP). First, there is a required upfront mortgage insurance premium that you make when you purchase your home. You also pay an additional mortgage insurance premium on top of your mortgage payments each month. The ongoing annual MIP of 0.45% to 1.05% is divided by 12 and added to your monthly mortgage payment.
FHA borrowers must pay MIP for either 11 years or throughout the loan term, depending on the amount you put down. Getting rid of MIP is one of the top reasons to refinance to a conventional loan.
You may also find that you can get a lower interest rate by refinancing to a conventional loan. If that’s the case, a refinance could save you thousands of dollars over your home mortgage loan term.
It’s also possible that you can increase or lower your mortgage payment with a refinance. If you find it difficult to make your monthly payments, a refinance may help you lower them. But note that a lower payment often comes with a longer loan term. On the other hand, you may decide you can pay off your mortgage faster, and so you refinance to decrease your loan term from 20 to 15 years, saving time and money.
Ultimately, you want a refinance to benefit you, so learn more from lenders and use an FHA loan mortgage calculator.
Requirements to Refinance From an FHA Loan to Conventional
You must qualify for a refinance through your credit score and debt-to-income ratio (DTI):
- Credit score: Many lenders look for at least a 620 credit score for a conventional mortgage refinance.
- DTI: Your DTI refers to the amount of debt you have relative to your income. There are no hard-and-fast requirements for DTI, but many lenders like to see a DTI of at least 43%. You can calculate your DTI by dividing your monthly debt payments by your gross income and converting that figure into a percentage.
Once you think you have your ducks in a row with your credit score and DTI, you must fill out applications with several lenders. Consider checking out the same type of interest rate and loan term so you can compare apples to apples among several lenders.
Get ready to submit your documents to prove your income and assets — pay stubs, tax returns, bank statements, proof of investments — to show underwriters that you indeed have those assets at your disposal.
Not sure you’ll qualify? A lender can walk you through all the requirements and help you determine whether a refinance to a conventional loan makes sense for you.
Pros of Refinancing From an FHA to Conventional Loan
Refinancing from an FHA to a conventional loan has some definite benefits. Let’s look at a few reasons:
- Get a lower interest rate: Many lenders require a minimum 580 credit score (or 500 with a larger down payment). You may qualify for a lower interest rate if your credit score has increased from the 500s.
- Get rid of MIP: As noted above, lenders charge MIP to compensate for an FHA loan’s lower credit and down payment requirements. Getting rid of MIP will save you money.
- Save on interest: Qualifying for a lower interest rate could save you thousands of dollars over your loan term.
Cons of Refinancing From an FHA to Conventional Loan
There are downsides of refinancing from an FHA to a conventional loan.
- Tougher qualifications: You must meet stiffer requirements to qualify for a conventional loan than an FHA loan. Again, there are no hard-and-fast rules governing qualifications, but so your best bet is to talk to lenders about your situation.
- Private mortgage insurance (PMI): You may not be off the hook for mortgage insurance. If you don’t have at least 20% equity in your home, you must pay PMI, which automatically cancels once you reach 22% equity. Consider how much you’d pay in MIP vs. PMI over time before you refinance your home.
- Closing costs: Refinancing requires you to pay closing costs, typically between 2% and 5% of the full loan amount.
Alternatives to Refinancing Your FHA Loan to a Conventional Loan
Instead of a conventional loan, you can choose to refinance your existing FHA loan to another FHA loan using a few options:
- FHA streamline refinance: A streamline refinance allows for limited documentation and underwriting. In order to obtain a streamline refinance, you may not be delinquent on your current loan, and refinancing must confer a net tangible benefit, meaning it must save you money. Some lenders offer “no cost refinances” by charging a higher interest rate in lieu of closing costs.
- FHA simple refinance: A simple refinance replaces your existing FHA loan, just like a streamline refinance. You get a new fixed- or adjustable-rate loan faster than when you received your original loan. A fixed-rate loan stays the same throughout a loan term, while an adjustable-rate loan interest rate changes over the loan term. One difference between the simple and streamline refinance is that the simple version typically requires a credit check and an appraisal of your home.
- FHA cash-out refinance: A cash-out refinance allows you to refinance with a larger loan amount and take the difference out in a lump sum. A cash-out refi could make sense if you need cash for a home project, education, or other reasons. The amount you can take out depends on how much your home is worth.
- FHA 203(k) refinance: How do FHA loans 203k work? An FHA 203(k) refinance allows you to roll any home improvement or renovations you want to make into your home loan. You can choose from a limited 203(k) refinance or a standard 203(k) refinance. The standard doesn’t have a ceiling on the amount you can spend, while the limited refinance supplies up to $35,000.
You may face time and payment restrictions when replacing an existing FHA with an FHA refinance. For example, an FHA streamline refinance requires you to have an FHA loan for at least 210 days and make on-time mortgage payments for six months.
(Learn more: Personal Loan Calculator)
The Takeaway
You don’t have to wait to refinance from an FHA to a conventional loan. Still, it’s essential to consider all the ramifications of refinancing — especially the costs and savings. You may have qualified as a first-time homebuyer for your original FHA loan. The process looks different when you refinance. If you plan to refinance to a conventional loan, check your credit report, debt-to-income ratio (DTI), and other factors, and talk through what you need to present to a lender to get a conventional loan. Ultimately, you want to ensure that you will benefit from a switch before you make your move.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Want to refinance your car? Read this first
Refinancing your auto loan is an opportunity to lower your interest rate, shorten or lengthen your term, change your monthly payment, and more. Refinancing may be able to help you save money, manage your monthly payment, or pay your loan off earlier.
Here’s a look at how auto loan refinancing works, the benefits of refinancing your auto loan, and reasons to refinance your car.
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When you refinance your car, you take out a new auto loan and use it to pay off your old loan. You will then make monthly payments on the new loan until it is paid off.
Ideally, this new loan will include some benefit for you, either a lower interest rate or a monthly payment that works better for your financial situation.
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Refinancing your car loan can provide a variety of benefits that may help improve your financial situation. Here’s a look at the most common reasons as to why you would refinance a car.
Lower Interest Rates
Interest is the amount of money you pay your lender to borrow money. When you first take out an auto loan, you agree to an interest rate. But you’re not necessarily stuck with it. You may be able to lower your interest rate when you refinance, which can save you money in the long run assuming you keep your term length the same or shorten it.
You may typically qualify for a lower interest rate in one of two ways. First, lenders set interest rates based in part on the federal funds rate. When the Federal Research lowers interest rates, lenders may do the same, providing an opportunity for borrowers to lower their rates.
Additionally, when borrowers build their credit score, they may qualify for a lower interest rate.
A refinancing calculator can help you examine your rates and gain an understanding of how much you might save when you refinance.
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When you refinance your auto loan, you have the opportunity to change your loan term. This is the agreed upon amount of time over which you’re required to make monthly payments until your loan is paid off.
When you decrease your loan term, you’ll pay off your loan faster. Your monthly payment will increase, but lenders frequently view shorter loan terms as less risky and may offer you a lower interest rate in exchange.
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You can also lengthen your loan term when you refinance. When you do so, you’ll be decreasing your monthly payment. However, by lengthening your term you’ll also be increasing the amount of time that you’ll need to make interest payments, which can end up costing you more in the long term.
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Before refinancing, there are some important potential disadvantages to take into consideration.
Associated Fees
There are costs associated with refinancing a car. Your lender may charge application fees to refinance your vehicle. Also, look into whether your initial auto loan charges early payment penalties. When you repay your loan early, lenders miss out on potential revenue from interest. They charge prepayment penalties to incentivize borrowers not to pay off loans early.
If refinancing your loan triggers prepayment penalties, be sure that the cost of the penalties does not override the savings you’d garner from refinancing in the first place. Finally, there may be other costs associated with refinancing. For example, depending on where you live, you might have to pay a fee to retitle your car.
Increased Interest
Depending on the choices you make when you refinance your car, you may end up paying more interest, namely if you increase your loan term to lower your monthly payment.
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When should you refinance your auto loan? You only want to refinance your car loan when it will benefit you. The following four situations may present the right opportunity.
1. You Need to Lower Your Monthly Payments
If you find yourself in financial distress or you’re otherwise no longer able to afford your monthly payment, refinancing can be a way to free up space in your budget. Refinancing to a loan with a lower interest rate will lower your monthly payments, as will lengthening your term. Just beware that when you lengthen your term, you may end up paying more interest in the long term. That said, paying extra interest may be preferable to missing loan payments and defaulting on your loan.
(Learn More: How to transfer money from one bank to another)
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The interest rate you qualify for is largely based on your credit score, a three digit representation of your credit history. Your credit score allows lenders to see how responsible you have been paying off your debts in the past. Lenders typically view borrowers with higher scores as less risky and will tend to offer them lower interest rates. Borrowers with lower scores, on the other hand, may qualify for loans with higher rates.
If your credit score has increased since you first took out your auto loan, you may now qualify for an auto loan with a lower rate, which could save you money on interest payments over the life of the loan.
(Learn more at Personal Loan Calculator)
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In some cases, you may not have gotten a very good deal on your original auto loan. So even if interest rates haven’t dropped or your financial situation hasn’t improved significantly, it may be worth shopping around for a loan with a better interest rate and better terms.
This may be especially pertinent for borrowers who financed their car with a loan from their dealer, since dealers may offer higher interest rates than other lenders.
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If you had no credit history or a poor credit score when you took out your auto loan, you may have needed a cosigner to qualify. Cosigners agree to make loan payments if the primary borrower is unable to do so. Since then, if you have established solid credit, you may qualify for a loan on your own and can refinance the loan in your name only.
Similarly, refinancing is the only way to remove a co-borrower from an auto loan.
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There are many reasons you may be interested in refinancing your car, including wanting to lower your monthly payments, being able to secure a lower interest rate, or wanting to remove a cosigner from your loan.
If you do decide to refinance your car, the first step is to shop multiple lenders to find the best interest rate and terms. Lantern by SoFi can help you compare loans from top lenders with just one simple application.
When you find a loan that works for you, you will fill out a loan application with your name, Social Security number, proof of income, and information about your previous loan.
Your lender will run a credit check and let you know if you qualify. Once you sign a loan agreement, you’ll pay off your old loan and begin making payments on your new loan.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Engine by MoneyLion. If you submit a loan inquiry, SoFi will deliver your information to Engine by MoneyLion, and Engine by MoneyLion will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Engine by MoneyLion, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.Personal loan offers provided to customers on Lantern do not exceed 35.99% APR. An example of total amount paid on a personal loan of $10,000 for a term of 36 months at a rate of 10% would be equivalent to $11,616.12 over the 36 month life of the loan.
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NOTICE: The debt ceiling legislation passed on June 2, 2023, codifies into law that federal student loan borrowers will be reentering repayment. The US Department of Education or your student loan servicer, or lender if you have FFEL loans, will notify you directly when your payments will resume For more information, please go to https://docs.house.gov/billsthisweek/20230529/BILLS-118hrPIH-fiscalresponsibility.pdf https://studentaid.gov/announcements-events/covid-19
If you are a federal student loan borrower considering refinancing, you should take into account the new income-driven payment plan, SAVE, which replaces REPAYE, seeks to make monthly payments more affordable, and offers forgiveness of balances that were originally $12,000 or lower after 120 payments, among other improvements. Also, please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as SAVE, or extended repayment plans.
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Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including but not limited to: credit standards, loan size, vehicle condition, and odometer reading. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness, consult with the lender for more details. Additional terms and conditions may apply and all terms may vary by your state of residence.
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