How To Get Out of an FHA Loan

You can refinance an FHA loan, but you may face some obstacles

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A Federal Housing Administration (FHA) loan has several advantages for homebuyers, especially those purchasing their first house. FHA loans typically have looser borrowing standards and lower down payment requirements.

However, you may want to get out of your FHA loan for several reasons. For example, you may want to eliminate the cost of mortgage insurance, get a better interest rate, or have new terms.

If you’re considering refinancing an FHA loan, learn more about the pros and cons, as well as how the process works.

Key Takeaways

  • To refinance out of an FHA loan, you’ll need to have equity.
  • Refinancing an FHA loan can potentially eliminate a mortgage insurance payment or lower your interest rate.
  • Your FHA loan may have required you to have permanent insurance premiums, depending on the size of your down payment.

Can You Refinance an FHA Loan?


Like with other mortgages, you can refinance FHA loans—but you’ll have to meet the requirements set by the new lender.

You may find refinancing an FHA loan challenging if you don’t have substantial equity. An FHA loan is attractive to many first-time homebuyers because they can benefit from a down payment requirement as low as 3.5% of the purchase price. However, if you are refinancing, a new lender is likely to require a larger down payment.

Most lenders use the loan-to-value (LTV) ratio to determine how much money they’ll lend you. This ratio compares the amount of the loan to the appraised value of the house. Lenders cap this ratio to minimize their risk. Some lenders require an LTV of 80%, while others may allow a higher LTV. So if your down payment was small and you have not built up equity, you may not qualify for a new loan.

If you have enough equity and meet other requirements, you can refinance out of an FHA loan with either a conventional mortgage or a streamline FHA refinance.

You can use a conventional refinance if you want to eliminate your mortgage insurance premiums, although the process will typically take longer. A streamline FHA refinance allows you to secure a different interest rate or terms, but you cannot drop your mortgage insurance obligation.

Pros and Cons of Refinancing to a Conventional Loan

  • Lower interest rates

  • No mortgage insurance

  • Lower monthly payments

  • Costs money

  • Takes time

  • Ties up your credit

Pros Explained

  • Lower interest rates: Depending on interest rate trends since you bought your home, you may be able to lower your rate with a new loan. You may also qualify for a lower rate if your credit score has improved or if your LTV ratio is lower.
  • No mortgage insurance: FHA loans require that mortgage insurance must be active for the life of the loan. In contrast, conventional mortgages allow you to drop insurance once your equity reaches 20% of the home’s value. So, refinancing out of an FHA loan can eliminate costly mortgage insurance premiums.
  • Lower monthly payments: Refinancing allows you to change the terms of your loan, including the rate and term. In addition to dropping mortgage insurance, altering these factors can help lower your monthly payments.

Cons Explained

  • Costs money: Refinancing entails closing costs, which are typically about 3% to 6% of your remaining balance.
  • Takes time: The process for streamline refinances can take several weeks to more than a month.
  • Ties up your credit: It’s best not to apply for any new credit while you are applying for refinance, to avoid complicating the underwriting process. Applying for new debt can affect your credit score, which can affect how much you may borrow and your interest rate.

How To Refinance Your FHA Loan

The process for refinancing will be familiar to you. Just like the first time, you’ll need to gather all your documents. This will include bank statements as well as proof of income. You’ll need to find a lender, which may be the bank that provided your original loan. Shop around to find the best rates and terms for you.

You will then apply for the loan, a process that will vary slightly by lender. Your lender may want an appraisal to confirm the value of the home and ensure you have sufficient equity.

Finally, you’ll sign the closing documents and begin making payments on your refinanced loan.

Some lenders may offer “no cost” streamline refinances that eliminate out-of-pocket costs for the borrower in exchange for a higher interest rate.

The Bottom Line

Refinancing out of an FHA loan can help you drop costly mortgage insurance premiums, secure better rates that can save you money in the long term, or provide new terms. If you have an FHA loan and are considering refinancing, weigh the pros and cons of loans from different lenders to find the best fit for you.

Frequently Asked Questions (FAQs)

How soon can I refinance an FHA loan?

There is no time limit on when you can refinance an FHA loan, although be sure that the benefits outweigh the costs. Refinancing takes time and money, and if the alterations aren’t worth it, you may want to wait.

How much is PMI on an FHA loan?

The amount you’ll need to pay on private mortgage insurance (PMI) can vary, but in general, you can expect to pay between $30 and $70 per $100,000 borrowed each month, or about 0.5% to 1% of the loan each year. However, if you made a down payment of at least 10% when you bought your home, your mortgage insurance will drop off after 11 years.

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Article Sources

  1. Consumer Financial Protection Bureau. “FHA Loans.”

  2. U.S. Department of Housing and Urban Development. “Streamline Refinance Your Mortgage.”

  3. Federal Reserve. “A Consumer's Guide to Mortgage Refinancings.”