Should you use an FHA Streamline Refinance or conventional mortgage to refinance an FHA loan?
There are multiple options to refinance an FHA loan including a conventional mortgage and FHA Streamline Refinance. The option that is right for you depends on your personal circumstances including your credit score and how much equity you have in your property. We review these financing alternatives below so you can decide the program that best meets your needs.
The benefits of conventional mortgage as compared to an FHA loan include not being required to pay an upfront mortgage insurance fee, which can run thousands of dollars for an FHA loan. Plus, you are not required to pay a monthly private mortgage insurance (PMI) fee if your loan-to-value (LTV) ratio is 80% or lower. Your LTV ratio is the ratio of your mortgage to the fair market value of your property.
If your property value has increased or if you paid down your mortgage balance since you obtained your original FHA loan, your LTV ratio may be lower than 80% and you are not required to pay PMI. Even if you are required to pay PMI, for a conventional mortgage, PMI is cancellable when your LTV ratio reaches as certain level -- usually 78% - 80% -- as you pay down your mortgage or your property value appreciated.
In contrast, with an FHA Streamline Refinance you are required to pay an upfront FHA mortgage insurance premium (MIP) fee when your loan closes and you are also required to pay monthly FHA MIP, regardless of your LTV ratio.
Please note that the upfront MIP fee may be discounted depending on when your original FHA loan closed. Monthly MIP, however, is non-cancellable in most cases which means you are required to pay the fee for the entirety of your mortgage.
This is why most people who can qualify select a conventional mortgage instead of an FHA loan when they refinance. The advantage is even greater if you intend to own your home and keep your mortgage for a long period of time. In fact, the longer you plan to have your mortgage, the greater the disadvantage of an FHA loan because you continue to pay the extra mortgage insurance fee every month.
Conventional mortgages are provided by traditional lenders such as banks, mortgage brokers and credit unions. We recommend that you contact multiple lenders in the table below to find the best refinance terms.
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The downside of a conventional mortgage -- especially as compared to an FHA Streamline Refinance -- is that the qualification requirements are far more challenging. To qualify for a conventional mortgage you are usually required to have a credit score of at least 620 to 640 and at least 3% homeowners equity, for a maximum LTV ratio of 97% (as long as you are not taking any cash out when you refinance). Lenders also verify your income and employment to confirm that you can afford the monthly mortgage payment.
In comparison, the FHA Streamline Refinance program does not apply a minimum credit score and lenders are not required to confirm your income or employment. Additionally, the program does not use a maximum LTV ratio which means you may be able to qualify even if you are underwater on your mortgage.
Review our FHA Streamline Refinance Guide
To be eligible for an FHA Streamline Refinance you must be current on your loan with no more than one late mortgage payment within the previous three months. You also must live in the property you are refinancing and your original mortgage must be an FHA loan. We should also highlight that you cannot personally receive any proceeds from an FHA Streamline Refinance although you may be eligible for an FHA Cash Out Refinance if this is your priority.
In short, it is significantly easier to qualify for an FHA Streamline Refinance than a conventional mortgage. So if you have little or no equity in your home or if you have experienced credit challenges an FHA refinance is likely your best and potentially only option.
Although you are required to pay additional mortgage insurance fees, FHA mortgage rates are usually lower than conventional loan rates, which helps to offset the extra cost. The table below shows FHA loan terms for leading lenders in your area. We recommend that you shop multiple lenders to find the lowest rate and closing costs.
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Another way to evaluate an FHA Streamline Refinance versus a conventional refinance is to compare the monthly payment for an FHA loan plus MIP, to the payment for a conventional mortgage plus PMI, if applicable. If the conventional mortgage payment is close to the FHA payment then the conventional option is usually the best choice for the reasons I outlined above.
Use ourMORTGAGE COMPARISON CALCULATORto compare loans with different rates and fees
In closing, applicants with sufficient equity in their homes and with good or better credit scores usually refinance with a conventional mortgage. Applicants with limited equity or lower credit scores are typically better off using the FHA Streamline Refinance Program. Either way, it is important to consider the positives and negatives both programs so that you can select the refinance options that is right for you.
Sources
"Standard Eligibility Requirements: Limited Cash-Out Refinance." Eligibility Matrix. Fannie Mae, October 2 2019. Web.
"Streamline Your FHA Mortgage."  Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
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