How to Convert an FHA Loan to a Regular Home Loan

By Joey Campbell

A 30-year (or 15-year) FHA loan is a comittment from the lender to service your loan until it is paid in full. In the event your loan is sold to another lender, the comittment still exists and the terms of the loan cannot change. Converting an FHA loan to a "regular" (conventional) home loan requires that the FHA loan be refinanced.

Make an appointment with your favorite mortgage broker. Take the list of documents needed and discuss the reasons why you wish to refinance your FHA loan. Conventional loans that are less than 80 percent of the property's appraised value do not require private mortgage insurance (pmi). (This is a type of insurance that protects the lender in case the borrower defaults on his loan). It would make sense to refinance when you are able to drop off the cost of mortgage insurance.

Complete the application with the broker and sign all of the documents. The broker will run the file through the DU system (desktop underwriting) which will give an approval within minutes. When approved, allow the broker to request the appraisal. This will require paying in advance, but is the only way to know for sure if a refinance can be done without paying mortgage insurance.

Stay in touch with your broker and when the appraisal comes in discuss the new value. Look at the new loan amount and divide it by the appraised value. This will give you your new loan to value percentage. If it is under 80 percent, you will be able to refinance with no mortgage insurance required.

Have your broker lock in the interest rate, and submit (send out) the loan package. Your broker will set up your closing with an attorney or title company (depending on what state you are in). When the "clear to close" message comes in, he will schedule your closing date and time. You will need to take your photo ID with you at closing.

Attend your closing on the date scheduled. Sign all documents required but be sure to ask questions about anything you do not understand. Your refinance is closed, but will not be funded for four business days. Federal law requires that you wait three business days (and disburse the funds on day four). This gives you three days to rescind the loan if you decide that it just isn't what you need.

There are many reasons to refinance from FHA to a conventional loan. For example:

- Divorces have one spouse buying the other out.

- If your home has gained a lot of appreciation, you might be able to refinance for cash out and drop off the monthly mortgage insurance premium, too.

- If you refinance the FHA loan in the first three years, you may be able to get a prorated rebate of the up front mortgage insurance premium (ufmip) which was financed in your FHA loan.

- You may be able to decrease your interest rate.

If you do not need cash out of the refinance transaction, you might consider doing a "Streamline Refinance" and staying in an FHA loan. Ask your broker about this option.

Be aware that you will incur new closing costs in a refinance.

Plan your closing and paying off the FHA loan in the last third of the month. FHA only will accept payoffs on the first business day of the month. Closing late in the month cuts down your paying unnecessary interest costs.

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