Smart Mortgage Strategy: Start with FHA, Then Refinance to Conventional

For many buyers, an FHA loan is a great way to get into a home with a low-down payment and flexible credit requirements. But what if I told you an FHA loan doesn’t have to be your forever mortgage?

A strategy I’ve used with my clients' time and time again is this: Use an FHA loan to buy the home, improve your credit over the next 12-18 months, and then refinance into a conventional loan. This way buyers can get into a home sooner while setting themselves up for better long term financial benefits.

Step 1: Use an FHA Loan to Get in the Door

FHA loans allow buyers to buy a home with as little as 3.5% down and more flexible credit requirements. This is great for buyers who:

• Have a lower credit score
• Need a low-down payment
• Want to qualify with a higher debt-to-income ratio

FHA loans are great for accessibility but come with mortgage insurance premiums (MIP) that stay with the loan for the life of the loan unless you refinance.

Step 2: Improve Your Credit Score

Once you’re in the home the goal is to boost your credit score so you can qualify for a conventional loan refinance. Here’s how:

• Make on-time payments – Your mortgage, credit cards and other debts all impact your score. Never miss a payment.
• Pay down existing debt – Lower credit utilization can help improve your score faster.
• Don’t take on new debt – Wait until you refinance to open new credit lines or loans that could impact your debt-to-income ratio.
• Check your credit report – Dispute any errors that could be dragging your score down.

Step 3: Refinance into a Conventional Loan

After 12-18 months of responsible credit management, you’ll likely qualify for a conventional loan which comes with big advantages:

• No more FHA mortgage insurance, saving you hundreds a month.
• Lower interest rates if your credit score has improved.
• Faster equity building with lower monthly payments, meaning more of your money goes towards paying off your home.

Final Thoughts

This way buyers can get into a home sooner while working towards a better financial position. Instead of waiting until you have a perfect credit score to buy, you can take advantage of FHA’s flexibility and then refinance when you’re ready.