Question by Dom: Is it possible to refinance FHA to conventional if house value has decreased a bit?
I have a FHA loan on a house we bought for $ 173,000 paying a 5.25% rate. Now rates are even lower so I would like to refinance by 3 year old FHA mortgage. My tax assessment on the property says the house is worth $ 160,000 and I have a principal balance of $ 164,730.
I would rather have a Conventional Mortgage and eliminate the impound accounts. Do I have to have 20% of equity built to get a conventional loan?
Answer by Art Vandelay
The tax appraised value is probably a little below a real estate sale appraisal amount, but close enough for some hypotheticals. The tax appraisal is probably about 85-90% of the market value, though this is just a general guess as each district appraises slightly differently).
If the house is only worth 160,000, you could get a conventional loan of 128,000 (80% of value). This would require you to come up with 36,730 down payment (to pay off the negative equity on the old loan and the 20% down on the new).
Also, if you want to waive the impounds/escrows, you will pay an additional fee for that feature as these are problematic for lenders (people are late paying the insurance or property taxes, notices have to go out, etc. Just a real P.I.T.A. for lenders).
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No, you do not necessarily have to have 20% equity however, if you have less than 20% equity, you will have to pay PMI. Some lenders may require 80%, so make sure to shop around.
Not sure what you mean by impound accounts, but if you mean the escrow account, you don’t eliminate them by going conventional – many banks will not lend unless you use the escrow account to pay the insurance and taxes since they have been burnt before when people got the tax bill, hadn’t saved the money and defaulted on the house.
Finally, tax assessments are usually low, so yours may not be accurate. The new lender will require a new appraisal – to get to 5% equity and pay off the $ 164,730, the house will have to appraise for about 4175,000 – and if you want to roll the closing costs into the mortgage, you may need the appraisal to come in at $ 178,000 or $ 179,000.
You can refinance an FHA loan with a conventional loan, however unless you have at least 20% equity in the home, you will have to pay PMI until such time as you have 20% equity. Most lenders also require a minimum of 20% equity to forgo impound accounts, and not all lenders are willing to forgo them regardless of how much equity that you have. I know that USAA Federal Savings and GMAC Mortgage both will forgo impounds as long as you have 20% equity and a 750 or higher FICO. Members Mortgage Services, who lend money for most credit unions, will forgo impounds with 20% equity and a 725 FICO. I’ve had mortgages with all 3 over the past few years and have not had an impound account for over a decade.
The assessed value for property tax purposes is meaningless when it comes to loan-to-value. The lender will need an appraisal from a certified appraiser before they can make an offer on a loan. If the true fair market value is $ 160k, it’s unlikely that you will get anyone to refinance the home today. You’re already upside-down a bit, though luckily not all that much.
With $ 164,730 to finance, you’d need a FMV of $ 205,913 to hit 20% equity to avoid PMI and dispense with impounds. Any PMI that you might have to pay would easily exceed any payment reduction that you might get with a 1% drop in rates.