To convert a conventional mortgage to an FHA loan, the homeowner must refinance through an FHA-approved lender. This involves meeting FHA eligibility criteria, including a credit score of at least 580, proof of income, and acceptable property standards. The new FHA loan will replace the conventional mortgage, with interest rates determined by the lender based on the borrower’s creditworthiness, loan-to-value (LTV) ratio, and current market conditions. The refinance process typically requires submitting documentation such as pay stubs, tax returns, and a property appraisal. After approval, the FHA loan’s fixed or adjustable rate will depend on the lender’s terms and the borrower’s financial profile.

The primary reason to convert is to access lower down payment requirements (as low as 3.5% for FHA loans) and flexible qualification standards compared to conventional loans. However, FHA loans generally have higher interest rates and mortgage insurance premiums (MIP). According to 2023 data from the U.S. Department of Housing and Urban Development (HUD), FHA loans average 6.5% to 7.5%, while conventional loans typically range from 6.0% to 7.0%. The MIP for FHA loans is 1.75% upfront and 0.85% annually, whereas conventional loans require private mortgage insurance (PMI) of 0.5% to 1.5% if the LTV exceeds 80%. For borrowers with limited equity or credit challenges, the lower upfront costs and lenient guidelines of FHA loans often justify the higher interest rate. Additionally, FHA-insured loans offer protections against default, which can reduce long-term financial risk. However, the decision should weigh the trade-off between lower rates and added insurance costs, as well as potential closing fees for refinancing. Lenders often recommend comparing total costs and monthly payments between both loan types to determine the optimal choice.