How to Get Out of an FHA Mortgage
If you bought your home when interest rates were high, even if you have a mortgage backed by the Federal Housing Administration (FHA), you may want to get out of it, either because you want a lower interest rate or you want to get rid of the Private Mortgage Insurance (PMI), or both. Getting out of an FHA-backed loan is no harder than getting out of any other loan. On the other hand, if you need to get a new mortgage to replace the FHA mortgage, you may face some challenges.
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Instructions
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Pay off the loan with cash. Once you pay off a mortgage, you own the house free and clear and no longer have a mortgage.
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Refinance the mortgage, if paying it off isn't feasible. You'll need 20 percent equity to get a conventional loan with good terms that is not backed by the Federal Housing Administration. Some banks may write a non-FHA mortgage with less than 20-percent equity, but ask questions; the terms may be costly.
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Find out approximately how much equity you have. To do so, look at your statement to see how much you owe, then ask a real estate agent for a fair-market value price opinion--most agents will do this for free. If you owe more than fair-market value, you are "upside down" and will probably not be able to refinance out of an FHA mortgage without paying the current mortgage down. Reputable banks do not finance more than the value of the house, and they also don't like to finance more than a certain percentage of the house.
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Talk to one or more banks or credit unions that do mortgage loans, paying particular attention to those that do conventional loans on 80 percent of the home's value, which will result in a realistic interest rate for you. When you choose a bank and fill out a loan application, they will send an appraiser to evaluate fair-market value before giving the new non-FHA loan final approval. You will probably have to pay the appraiser on the spot.
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Prepare the house for appraisal. Fix whatever needs fixing, clean, and perhaps add some shrubs. To ensure a higher appraised value, consider replacing worn, battered, or dated items such as the front door or living room carpet.
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Stay in touch with your loan officer, assuming the house appraises for the value that the bank expects. By staying in touch, you help to ensure that the plans to close the loan stay on track.
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Tips & Warnings
If you are a veteran, you may qualify for a VA loan with no equity.
Mortgages are complex financial instruments. You don't have to, but consider hiring a real estate attorney to look over the paperwork and represent you at closing.
