Conventional Refinance: What You Need To Know

A conventional refinance is a non-government-backed loan that is used to refinance or replace any existing mortgage. It is also known as a conforming loan, since it conforms to standards set by the two leading rule-making agencies in the U.S., Fannie Mae and Freddie Mac.

A conventional loan can refinance any loan type, so it has many uses.

• Cancel FHA mortgage insurance
• Consolidate a first and second mortgage
• Refinance another conventional loan
• Get out of a high-interest sub-prime or Alt-A loan
• Refinance an adjustable-rate mortgage (ARM) into a fixed rate loan

These are just a few of the options available to conventional refinance applicants. This loan is one of the most flexible programs on the market. It’s no surprise that conventional loans make up more than 60% of the market, according to loan software firm Ellie Mae.

Conventional refinance rates are low, thanks to their popularity and lenders’ eagerness to attract conventional loan business.

Conventional Refinance Rates

Mortgage rates for conventional loans are low thanks to strong backing by two of the world’s largest lending agencies: Fannie Mae and Freddie Mac.

These two companies have been in government “conservatorship” since the housing downturn in 2008. What that means is that conventional loans come with an implied government guarantee.

That reduces rates for these loans.

Conventional loans are nearly in the same class as FHA loans. While conventional loan backing is not explicit as it is with FHA, many argue that the implied guarantee is keeping conventional mortgage rates artificially low

As a consumer, you can take advantage of ultra-low rates for a conventional refinance while they are available.

How can I use a conventional refinance?

A conventional refinance loan is one of the most flexible products on the market. Homeowners are using it to accomplish a wide array of home finance goals.

1. Conventional Refinances for Non-owner Occupied Residences

One flexibility offered by this loan is around occupancy type.

Government-backed loans like FHA, the VA mortgage, and USDA home loan can be used only for a primary residence, i.e. the home you live in.

A conventional refinance loan, though, can be used for a primary residence, second home, or investment (rental) property.

2. Cash-out / Debt Consolidation Conventional Refinance

You can also use a conventional cash-out loan to tap into the equity in your home. For example, if you owe $200,000 on a home worth twice as much, you can take out a loan for $300,000, replacing the former loan and receiving cash back at closing.

These proceeds can be used for any purpose: home improvement, debt consolidation, college financing, and more.

A conventional loan, then, can lower your monthly payments by paying off expensive credit cards, auto loans, and other payments.

A conventional refinance can even be used to take cash out of a rental property or second home. For property investors, this is an excellent way to remove equity from existing properties to purchase additional ones.

3. Cancel FHA or USDA Mortgage Insurance

Many first-time home buyers choose a government-backed mortgage to get into their first home.

And for good reason.

Government-sponsored programs are flexible on credit scores and down payments. However, they come at a cost.

FHA loans include a monthly mortgage insurance premium (MIP) of $71 per month per $100,000 borrowed. USDA home loans, too, come with a monthly fee, typically $29 monthly per $100,000 in loan amount.

These fees are well worth home ownership. But owners don’t want to pay the fees for life if they have enough equity to cancel these payments.

A conventional refinance exchanges an FHA or USDA loan for a conventional one, thereby eliminating associated monthly fees. And, with 20% or more equity, you pay no mortgage insurance on the new conventional loan.

Home values are up 35% since 2012, and homeowners are realizing their equity makes holding government-sponsored loan fees unnecessary.

4. Refinance Out of *Any* Type of Loan

Many streamline refinance types require you to have a certain type of loan to use the program.

A VA streamline refinance requires you to have a VA loan already, and the popular FHA streamline has a similar requirement.

But a standard conventional refinance can replace any loan type:

• FHA
• VA
• USDA
• Sub-prime
• Option ARM
• Alt-A
• Standalone second mortgage
• First and second mortgage combo

In addition, mechanic’s liens, tax liens, and judgments on your title can be paid off with a conventional loan.

There are absolutely no restrictions on your current financing type to use a conventional refinance.

5. Reimburse a Cash Home Purchase

You can use a conventional refinance to reimburse yourself for a home paid for in cash.

The “delayed financing rule” allows you to make a quick purchase using cash — as is often required with foreclosures and homes on the auction block — without permanently depleting cash reserves.

Prior to the inception of this rule, investors had to wait six months to obtain a cash-out refinance on a home they just purchased. The rule eliminates that waiting period, as long as these requirements are met:

• The cash used for the original purchase must be documented to the bank
• The new loan size may not exceed the property’s original purchase price
• A title search must show that no liens exist on the home

The buyer must prove the home sale actually occurred and that no loan was taken on the home. A final HUD-1 / Closing Disclosure document is adequate proof.

2019 Conventional Loan Limits

Missouri loan limits are higher for conventional refinance loans in 2019. The standard loan limits are based on the number of units in the home. The maximum number of units for a conventional loan is four.

• The conventional loan limit for a 1-unit home: $484,350
• The conventional loan limit for a 2-unit home: $620,200
• The conventional loan limit for a 3-unit home: $749,650
• The conventional loan limit for a 4-unit home: $931,600

Limits are higher in designated high-cost areas.

For example, a one-unit home in Los Angeles, California can be financed up to $726,525 with a conventional mortgage, and a 2-unit home in Alabama is allowed a loan up to $620,200.

Loan-to-value (LTV) maximums for conventional refinance loans

Maximum loan-to-value will vary depending on the loan purpose, type of property, and whether the new loan is a fixed or adjustable rate mortgage (ARM).

For instance, lenders allow a much higher LTV for a primary residence than for a non-owner-occupied property.

Loan-to-value, or LTV, is the comparison between the loan amount and the property value. The higher the loan amount compared to home value, the higher the LTV.

Loan-to-value ratios for conventional loans are generous, and allow homeowners of all types to refinance a significant portion of their home’s value.

Conventional refinance credit score minimum

This refinance type is available down to a 620 score, or even lower in some cases.

At least, those are official Fannie Mae and Freddie Mac guidelines.

Many lenders will set a higher minimum around 640. But it should be noted that conventional loan rates are risked-based, unlike government-backed programs like FHA.

Fannie Mae publishes loan-level price adjustments, or LLPAs, which raise rates for higher LTVs and lower credit scores.

For instance, a homeowner with a 680 credit score and a loan-to-value of 80% will pay 1.75% more in fees than an applicant with a 740 score at 60% LTV. Those additional fees can be paid in cash, wrapped into the loan amount, or taken as a higher rate.

A 1.75% fee translates to an approximate one-quarter of one percent increase in rate.

For this reason, homeowners with very low credit scores should consider an FHA refinance or  put strategies in place to increase their credit scores prior to applying for a conventional refinance.

Private mortgage insurance for conventional refinances

Conventional mortgages do not require an upfront funding fee or mortgage insurance premium as do FHA, VA, and USDA loans. And, no monthly mortgage insurance is required with 20% or more equity.

But homeowners can refinance into conventional if they do not have a full 20% in equity. In these cases, private mortgage insurance (PMI) will be required.

A homeowner may want to refinance into conventional — even with a PMI payment — because conventional private mortgage insurance is cancellable, unlike that of FHA and USDA loans.

Conventional PMI drops off when you hit 80% loan-to-value.

So you could replace an FHA loan with a conventional loan with PMI, for instance, then cancel PMI in a few years.

With high credit scores, conventional PMI is quite affordable, and, in some cases, is cheaper than FHA mortgage insurance.

Canceling FHA mortgage insurance with a new conventional loan can be a very wise strategy.

Conventional refinance Q&A

Following are some of the most common questions homeowners have about conventional mortgage refinances.

I was considering an FHA streamline. Should I request a conventional refinance instead?

It is worth seeing if you have enough equity for a conventional refinance. The advantage of a conventional loan is that your mortgage insurance is cancellable, if you need it at all.

My appraisal came in low. What now?

Some lenders offer an appraisal rebuttal process, but these are not typically successful. Check your eligibility for HARP. If you are not eligible, consider going through with the refinance. It’s okay to take on cancellable conventional PMI if you are still saving money or putting yourself in a better financial position.

What are today’s conventional refinance rates?

Mortgage rates are low for all loan types, conventional refinances being no exception. Please see our contact information down below to get a VA mortgage interest rate quote from one of our loan officers.

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Posted by: Carlson Mortgage – a top-rated St. Louis mortgage broker providing home loans in the state of Missouri. We are routinely ranked as a #1 mortgage broker in Missouri on Yelp, Google and Zillow. We can be reached at (314) 329-7314 seven days a week.

Our loan application can be found here or you can call us at 314-329-7314 to speak with one of our mortgage loan officers. Also, here is our pre-approval page, if you are looking to buy a home or need a referral to a top real estate agent.

Let us be your source for some of the lowest mortgage interest rates in St. Louis on first-time home buyer, conventional, FHA, Veterans (VA), Jumbo and condominium (condo) financing. Since 2004, we’ve been providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. Our loan officers speak English, Spanish and Russian. Call us today to inquire about home loan interest rates, to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.