What is a conventional refinance loan?
Conventional refinance is when you replace your existing home loan with a conventional mortgage. This type of refinance is versatile. You can use it to obtain a lower mortgage rate, get cash-out from your home equity, reduce the length of your loan term, refinance rental properties, or any other purpose. To be eligible, your current loan does not have to be conventional, FHA loans and USDA loans, or any other program can be refinanced with a conventional mortgage.
What are the best ways to use a conventional refinance loan?
Conventional refinance loans are among the most versatile products available in home refinance. This refinance option is being used by homeowners to achieve a variety of home and personal financial goals.
1. Conventional refinance cash-out or debt consolidation
To tap into your equity, you can also apply for a conventional cash-out loan. If you owe $100,000 on your home, and it is worth twice that amount, you may be eligible for a $150,000 loan to replace the loan and receive extra cash at closing.
You can use these proceeds for home improvements, debt consolidation, college financing, or any other purpose. Conventional loans may also be a better option as it will pay off your credit cards and auto loans. Conventional refinances can also be used to withdraw cash from a second or rental property. This is a great way for real estate investors to take equity out of existing properties and purchase new ones.
2. Refinance any type of mortgage
Many Streamline Refinance loan options will require that you have a specific type of mortgage in order to be able to use them. An FHA streamline refinance requires that you have an FHA loan and the VA streamline has similar requirements. And while there’s no conventional streamline refinance, per say, theses programs still carry many benefits. A standard conventional refinance is able to replace any type or home loan including:
- FHA Loans
- USDA Loans
- VA Loans
- Alt-A Loans
- Second Mortgages
- 1st and 2nd Mortgages Combined
- Sub-Prime Loans
- Option ARMs
A conventional loan can also be used to pay off judgements, tax liens, and mechanic liens. You can use any type of financing you choose to refinance conventionally.
3. Remove FHA or USDA mortgage insurance
First-time home buyers often opt for a government-backed loan to purchase their first home. It’s a good choice. Programs sponsored by the government are flexible in terms of credit scores and down payment requirements. They come at a price though. And while these costs are a well-rewarded price of homeownership, borrowers don’t always have to pay them over the life of the loan if they have enough equity to remove them.
Conventional loan programs allow you to refinance an FHA loan for Conventional, or even refinance a USDA loan for one that is conventional too, often eliminating monthly fees. You don’t have to pay mortgage insurance for a conventional loan if you have 20% equity or more. You can also still apply for a conventional refinance with insurance even if you don’t yet have 20% equity.
The value of homes across the country are much higher than they were just a short time ago. As a result, homeowners are understanding that their equity makes paying mortgage insurance fees unnecessary in many cases.
4. Refinance for non-owner occupied homes
Conventional refinance loans offers great utility for various occupancy types.
USDA, VA, and FHA home loans are government-backed mortgage programs that help potential buyers purchase single-family residences, and they can only be used for a primary residence.
Conventional refinance loans can be used to finance a primary home, second home or rental property. Your rate may not be as low as it would for your primary home, depending upon the property’s usage, and investment properties usually carry the highest rates and fees.
2022 Conventional loan limits
Conventional refinance loan limits have gone up again in 2022. Standard loan limits are determined by the number of units within the home. A conventional loan can only be used to refinance a property up to four units.
| Units | Continental U.S. and Puerto Rico | Alaska, Hawaii, Guam, U.S. VI |
|---|---|---|
| 1 | $510,400 | $765,600 |
| 2 | $653,550 | $980,325 |
| 3 | $789,950 | $1,184,925 |
| 4 | $981,700 | $1,472,550 |
Check conventional loan limits for your area here.
Maximum loan-to-value (LTV) for conventional refinance loans
LTV (Loan-to-Value) is the ratio between the loan amount to the property value.
The maximum loan-to-value ratios used depend on the purpose of the loan, the property type, and if the desired mortgage will be a fixed-rate loan or an adjustable-rate loan. For example, lenders permit a higher loan-to-value on a primary residence than on an investment property that’s not occupied by the owner.
Check your loan-to-value ratios here.
Standard Rate-Term Refinance Maximum LTV
| Residence Usage | Fixed-Rate Mortgage (FRM) | Adjustable-Rate Mortgage (ARM) |
|---|---|---|
| 1 Unit Primary | 97% LTV | 90% LTV |
| 2 Units Primary | 85% LTV | 75% LTV |
| 3 Units Primary | 75% LTV | 65% LTV |
| 4 Units Primary | 75% LTV | 65% LTV |
| 1 Unit Second Home | 90% LTV | 80% LTV |
| 1 Unit Investment | 75% LTV | 65% LTV |
| 2 Units Investment | 75% LTV | 65% LTV |
| 3 Units Investment | 75% LTV | 65% LTV |
| 4 Units Investment | 75% LTV | 65% LTV |
Cash-Out Refinance Maximum LTV
| Residence Usage | Fixed-Rate Mortgage (FRM) | Adjustable-Rate Mortgage (ARM) |
|---|---|---|
| 1 Unit Primary | 80% LTV | 75% LTV |
| 2 Units Primary | 75% LTV | 65% LTV |
| 3 Units Primary | 75% LTV | 65% LTV |
| 4 Units Primary | 75% LTV | 65% LTV |
| 1 Unit Second Home | 75% LTV | 65% LTV |
| 1 Unit Investment | 75% LTV | 65% LTV |
| 2 Units Investment | 70% LTV | 60% LTV |
| 3 Units Investment | 70% LTV | 60% LTV |
| 4 Units Investment | 70% LTV | 60% LTV |
Above percentages are based upon standard loan requirements for traditional conventional mortgages.
Conventional Streamline Refinance Options
Numerous applicants want to know if there’s a streamline refinance available for conventional loans. Streamline programs don’t require an appraisal, and sometimes income verification and asset documentation can be waived too.
There’s no specific streamline conventional refinance program available today, but there are options to consider. Recent regulations allow for more conventional refinances to be made without the need for an appraisal, with often cost $500 or more. Eliminating that step obviously translates into some nice savings for the mortgage applicant. Strong applicants may also have their income documentation reduced in certain instances, eliminating the need for submittal of W-2s, tax returns, and pay stubs.
