I Have a Conventional Mortgage. Can I Refinance to an FHA Home Loan?

Posted by  on Nov 25, 2009

Dear Liz,

I bought my house with a normal 30-year loan at 6.5% with 10% down. I'd like to refinance to today's rate of about 5%, but my home value has dropped a little and so has my credit rating. Can I refinance from my Fannie Mae mortgage to an FHA loan?

Sean in Seattle


Dear Sean,

Of course you can refinance into an FHA mortgage, as long as your loan amount falls within FHA loan limits. In Seattle, that would be the King County limit of $567,500.

Many homeowners whose equity position isn't strong enough to allow them to be approved by a conventional lender are opting to get their best mortgage interest rates by refinancing to an FHA home loan. FHA loans do require a Mortgage Insurance Premium (MIP), which may be higher than the standard private mortgage insurance charged by conventional lenders, depending on how much equity you have. However, the upfront MIP can be financed into your FHA loan, so you don't have to pay it out of pocket.

The upside is that FHA does not impose the surcharges that Fannie Mae and Freddie Mac do with their risk-based pricing. Check out Fannie Mae's Loan Level Pricing Adjustment matrix, find your credit score, loan-to-value ratio, and property type, and see how easily you could end up with 3, 4, or more points tacked on to your loan fee. If your credit is a little tarnished and you don't have loads of equity, FHA may well be your best choice.

FHA underwriting guidelines are more flexible than those for conventional loans. A low credit score won't automatically get you disqualified; borrowers' applications are reviewed individually. Usually, bankruptcies must have been discharged at least two years ago, and a foreclosure must be at least three years old before you can get an FHA loan. Regardless of your score, if you can prove that past credit problems have been resolved and are unlikely to recur, you have an excellent chance of getting a loan. In addition, FHA lenders have some wiggle room when it comes to your income--for example, if your proposed housing payment is on the high side, but your refinance payment will be lower than what you have been paying, you are likely to get your loan approval.

FHA refinances have become very popular for a number of reasons. But even FHA has been slowly tightening its underwriting guidelines and appraisal requirements, and rates aren't getting any lower. I suggest that you shop for a good lender and start the process very soon.


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