Home Buying in Portland>Question Details

Ron Dotson, Home Buyer in Deadwood, OR

Is it possible to convert an FHA loan into a "normal" fixed rate loan by paying off 20% or more of the principle?

Asked by Ron Dotson, Deadwood, OR Mon Aug 20, 2012

Due to the housing situation and my fear of being underwater after buying a house even at this late date, I think I would like to get an FHA loan with only 3% down and pay the mortgage insurance for the first couple of years so that I could walk away and forfeit the house without having lost a 20% down payment if necessary. If I feel confident in housing prices after a year or two, then I would like to essentially make the 20% (or more) down payment in order to drop the mortgage insurance payments. Is this possible and feasible?

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7
John Burke’s answer
Hi Ron,

Yes and no. FHA requires that you have MI until you reach 78% loan to value or you've paid it for 5 years, whichever is longer so you would have the MI for at least 5 years.

Another option would be to refinance out of the FHA mortgage and into a conventional loan when you're ready to apply the rest of the 20% down payment.

You maybe able to buy with a conventional loan and 5% down which would allow you to pay down the balance later and drop the mortgage insurance as long as the appraised value supports it.

Please feel free to contact me for more info or help.

John Burke
Senior Mortgage Banker
ENG Lending
(877)228-9069
1 vote Thank Flag Link Tue Aug 21, 2012
Call Tami wood 478 714 2520. She is an ethical mortgage expert.
0 votes Thank Flag Link Fri Aug 31, 2012
You can refinance from an FHA to conventional. I closed one last week where the purchase loan was FHA just one year ago and they refii'd into a conventional loan. They hadn't paid anything extra just the regular payments and we got away with a drive by appraisal to boot. I am not saying this will be your case per say but it's feasible.

Another option is going with a single premium MI, consider if the numbers but with an A to B Plus borrower it will usually pencil out.

However your talk of "walking" is concerning. One of the best reasons to buy in this market is the affordability factor. It is cheaper to buy than rent in most areas here in Portland. If you are able to keep making timely payments and maintain if not make improvements to your home your still ahead of the game as a homeowner. Consider not only the reduction in your tax burden but your real estate holdings in the long run. I agree that the thought of being underwater is disheartening however it only counts if you have to sell. I would never encourage anyone to "walk" when there are better options. Better not only for your credit but on our road to recovery in the housing market.
0 votes Thank Flag Link Fri Aug 24, 2012
I agree, John gave a great answer. The one thing I would add though is that if you decide to refinance to a conventional loan and have mortgage insurance on that loan the clock starts ticking and you have to have the mortgage insurance for at least two years. After that time the ssame 78% rule applies. The difference however, is that it would now be 78% of the current apprasied value which is probably less than the value or purchase price when you did your FHA loan. Be careful, you dont want to extend the time you need the mortgage insurance any longer than you have to.
0 votes Thank Flag Link Thu Aug 23, 2012
I would like to thank all of you for your excellent answers and information, and especially John Burke who I chose as the best answer because of his clear explanation and credentials as a Mortgage Banker. Thank you all.
0 votes Thank Flag Link Tue Aug 21, 2012
Yes it is possible. I dont think I would call it a conversion though. When you reach the 20% equity position you can have the home appraised by an approved appraiser and request to have the mortgage insurance removed. Rules vary from lender to lender so you should check with your lender of choice to see what their rules are with respect to that. In reality depending on the market you are looking to buy in and the price range. If you put 20% down initially and do your homework on your purchase I would find in hard to believe that you could loose your 20% entirely. The mortgage insurance on the other hand is gone the second you make the payment. I think the thing to realize.... is..... the home..... like any other investment has plusses and losses. If you think of it as a home.... rather than an investment ....sure you may loose a little.... but doesnt everything has some cost of use to it?

And how do you put a price on enjoyment and security?
0 votes Thank Flag Link Mon Aug 20, 2012
We will need a mortgage broker to weigh in, but I think you have to pay the mortgage insurance for 5 years on an FHA loan before you can get rid of it. You can, of course, refinance into a conventional loan at that point as well.
0 votes Thank Flag Link Mon Aug 20, 2012
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