How easy is it to refinance FHA to conventional?

Question

My business partner and I are interested in househacking a duplex together. As of now, it appears with all the uncertainty and chaos that corona has brought, banks are a bit hesitant about lending doing 5% down conventional loans, which was our original plan.

That being said, FHA very well might be our best bet. However, we really want to avoid the cash flow killing mortgage insurance asap, and so we are thinking about building 20% equity as quickly as possible so we can refinance to a conventional loan.

My only concern with this strategy is that when it comes time to refinance, it might be difficult to do so. I would like to know how easy it is to refinance from FHA to conventional. I know that in some instances, its really not that easy at all but for our situation, would the process be straightforward?

Amar Thapa · Answer

Even with 5% conventional, you still have to pay PMI until you reach 20% equity or auto cancellation on 78% LTV. You can also take a no PMI rate which is higher (ie 3.375% with PMI vs 4.5% no PMI), over the life of the loan you will end up paying a lot more with the higher rate. Or you could pay a one-time upfront PMI buyout when closing if you have the money.

To refinance out of FHA isn't hard, you just have to pay closing costs again(origination fees, usually points to get a certain rate, appraisal, and rebuilding escrow). IMO, I would go conventional and take the low rate. Pay upfront PMI if you can or just pay monthly PMI till you reach 20% equity. That way you have a low interest rate and not have to refinance out of FHA and pay closing cost again.

Ian Stuart · Answer

If you can get up to 20% down - Fannie Mae, Freddie Mac, and the local banks will be able to be competitive on rate and interest only. With HUD you're probably doing a 223(f), so the 35 years of amortization is nice vs. an agency (Freddie/Fannie) 30 year amortization. That said - the agencies will get you 5 years of IO on a fully levered (75%-80% LTV) deal which will help your cash flow at a 3.40% - 3.75% rate in top markets. FYI - you'll need to be able to prove 100% loan amount net worth and 9 months amortizing payments liquidity to qualify for a Fannie / Freddie deal. Fortunately you can spread this out over multiple guarantors - you alone don't need to be able to come up with this financial backstop, but your team of partners as an aggregate group does.

IDK what your prepay is on the HUD deal, but if you just did the deal 1-4 years ago, might be best to wait till your massive prepay comes back down to earth so you don't get clobbered on the settlement statement.

Plus that insane HUD leverage.... but then again you probably have MIP if you're really levering it up.

Feel free to call / email anytime during biz hours 9AM - 5PM PST.

Cheers,

Ian

Jaysen Medhurst · Answer

@Ethan McRae, assuming your credit/finances are in good shape when it comes time to refi, I don't thing there's any reason to think that will be a challenge. That's a few years down the road. There's no telling the state of mortgage underwriting at that point.

Ethan McRae · Answer

@Nicole Heasley

@Eric Johnson

@Chris Mason

Wow thanks for the input guys. Really appreciate the advice.

This is a lot to think about. I really want to get the ball rolling soon, but the pmi is a bit of a problem- it can mean the difference between a cash flowing property and a dud. Thanks again.

@Michael Guay

Chris Mason · Answer

The mortgage industry is going through a significant liquidity crisis right now. Impossible to predict where things will be in 6 months.

Underwrite the deal to the standard of "if we're stuck in FHA, can we at least get by?" with the possible (but not necessary) upside of that refinance out of FHA down the line.

Eric Johnson · Answer

Hi Ethan, you're definitely going to want direct feedback from prospective lenders. Make sure you explain to them every detail of your plan though. You don't want to get to the refi side and they say "oh, you didn't tell us that. We can't do this deal."

Nicole Heasley Beitenman · Answer

It's really going to depend on the lender and the condition of the property. I'd reach out to a few lenders now, explain your plans, and ask for their feedback. Ask what pitfalls tend to hurt refinances so you know what to avoid. Good luck!