Borrowers who can't qualify for conventional mortgages often apply for loans insured by the Federal Housing Administration. Though these loans are easier to obtain, the mortgage insurance that borrowers must pay to secure them can be expensive. If borrowers eventually qualify for conventional financing, they may refinance to eliminate FHA mortgage insurance.
About FHA Mortgage Insurance
Regardless of the length of your mortgage, FHA will require you to pay 1.75 percent of your loan balance in upfront mortgage insurance. If you obtain a loan with a 30-year term, you will also pay annual mortgage insurance premiums. If you obtain a loan with a 15-year term, you will pay annual mortgage insurance premiums only if your loan-to-value ratio is greater than 78 percent.
Though you can eliminate FHA mortgage insurance by refinancing, you must meet conventional mortgage requirements to do so. To qualify for conventional financing, you must have a minimum credit score and a stable source of income. You must also show that your debt-to-income ratio doesn't exceed the lender's limits. If you were unable to obtain conventional financing when you secured your original FHA mortgage, you will be able to refinance with a conventional loan only if your circumstances have changed.
Even if you aren't able to drop FHA mortgage insurance through refinancing, your mortgage insurance will eventually expire on its own. If you have a 15-year mortgage, FHA will cancel your mortgage insurance automatically as soon as your loan-to-value ratio reaches 78 percent. If you have a 30-year mortgage, FHA will automatically cancel your mortgage insurance as soon as your loan-to-value ratio reaches 78 percent and you have paid the premiums for a minimum of five years.
Some borrowers with 30-year FHA loans who don't qualify for conventional refinancing may be able to drop mortgage insurance by obtaining a 15-year refinance insured by FHA. However, the payment required for a 15-year mortgage will be significantly higher than the payment required for a 30-year mortgage with the same balance. Even if you drop FHA mortgage insurance with a conventional refinance, the lender may still require you to pay private mortgage insurance if your loan-to-value ratio is greater than 80 percent.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.