How Much Equity Moves a Strong-Credit FHA Buyer to Conventional

The Quick Read: No official rule sets one equity number for leaving FHA. The number comes from conventional mortgage insurance rules: at 20% equity or more, a new conventional loan carries no mortgage insurance, and the FHA premium disappears with the old loan. Below 20%, a strong-credit borrower can still switch, but the new loan carries private mortgage insurance (PMI). Whether the switch pays off depends on how long the FHA premium would last, what PMI would cost, and the closing costs on the new loan.

Two different readers land on this question. One is still choosing a loan and has strong credit. The other already holds an FHA loan and wants out of its insurance. The mechanics differ, so this article covers both.

Key Terms Defined

Equity: The home’s current value minus what you owe on it.

LTV (loan-to-value): The loan balance divided by the home’s value, shown as a percentage.

CLTV (combined loan-to-value): The same measure, but with every loan on the home added together, including a second mortgage or HELOC.

MIP (mortgage insurance premium): The insurance FHA loans carry, paid as an upfront premium and an annual premium.

PMI (private mortgage insurance): The insurance conventional lenders require above 80% LTV. It protects the lender, not you. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Streamline refinance: An FHA-to-FHA refinance with reduced documentation.

Why Equity Is the Lever

Equity is the lever because the conventional rule is a hard line at 80% LTV. Fannie Mae’s Selling Guide requires mortgage insurance when the LTV is above 80%. Freddie Mac’s guide says the same. Cross below that line and the insurance cost on a conventional loan goes to zero. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

FHA works differently. Across the wholesale programs Lendmire places FHA files with, the annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. The upfront premium is 1.75% of the base loan, usually financed. How long the annual premium lasts depends on the original LTV. On a thirty-year loan above 90% LTV, it lasts for the term. At or below 90%, it ends after eleven years.

That timing rule comes from HUD Mortgagee Letter 2013-04, a copy hosted by FHFA. It applies to FHA case numbers assigned on or after June 3, 2013. The letter also rescinded the older automatic cancellation of annual premiums.

Here’s the catch. The duration is fixed when the loan is made. It is not tied to today’s equity. A borrower who put down 3.5% and later reached 40% equity still pays the premium under the same schedule. Paying extra principal does not change it. The exits are refinancing, selling, or paying the loan off.

That is why the equity question exists at all. For many FHA borrowers, the only way to end the premium early is a new loan, and a new conventional loan prices on current LTV.

How Strong Credit Changes the Equity Math

Strong credit does not move the 20% line, but it changes what happens below it. The 80% trigger is a fixed rule. What credit changes is the cost of PMI under it. Mortgage insurance pricing on conventional loans steps up with LTV and steps down with credit score. A borrower with excellent credit at 90% LTV pays far less for PMI than a borrower with a weak score at the same LTV. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

FHA does not price this way. Its annual premium responds to term, loan amount and LTV, not to the credit score. So a strong-credit borrower in an FHA loan is, in effect, paying a premium schedule built without credit in it. That is the gap a conventional loan can close.

Here is how the equity zones tend to play out for a borrower with strong credit.

Exact conventional minimums sit in Fannie Mae’s eligibility matrix and vary by occupancy, property type and loan type. Treat the table as a map, not a program sheet.

One more difference matters. PMI can end. Under the Homeowners Protection Act, the CFPB explains that you can ask to cancel PMI when the balance reaches 80% of the home’s original value. That request needs a good payment history, no junior liens, and evidence that value has not fallen below the original. Servicers must end it automatically at 78% if you are current. So a strong-credit borrower in the middle zone gets a premium with an end date. A post-2013 FHA loan above 90% LTV does not offer that. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

Some lenders and servicers allow removal under their own standards too. Those policies vary, so they are not something to plan around.

Calculating Your Real Equity

Start with the payoff balance and an honest value. Equity is value minus payoff. LTV is payoff divided by value. If the payoff is 85% of value, LTV is 85% and equity is 15%.

Value is where plans fail. A new conventional refinance prices on current value, and the lender decides how to establish it. Fannie Mae allows an appraisal, an automated valuation model, or another acceptable method for refinance value. The CFPB’s original-value rules apply to cancelling existing PMI. They do not apply to a new loan.

So treat the appraisal as a risk. A borrower who needs exactly 20% equity and gets an appraisal a few percent light lands just above 80% LTV. PMI comes back and the plan changes. Build a cushion. If the math only works at the top of your value estimate, it does not work yet. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Add every lien. A second mortgage or HELOC raises combined LTV and can change how the new loan is classified. It can also block PMI cancellation on a conventional loan down the road.

Then check the loan size against conforming limits. The 2026 baseline for one-unit properties is $832,750, per the National Association of Home Builders’ report on FHFA’s figures. High-cost counties go higher. Larger balances fall into high-balance or jumbo territory with tighter leverage rules. For example, Fannie’s matrix does not permit LTV above 95% on high-balance loans.

Two Paths: Choosing Now and Switching Later

The buyer choosing now. A buyer with strong credit and a modest down payment can compare both loans from day one. Across the wholesale programs Lendmire places FHA files with, the FHA purchase maximum is 96.5% financing with a 3.5% minimum investment at a decision score of 580 or higher. Strong credit usually points toward conventional once PMI pricing is on the table, because the credit-blind FHA premium costs the same either way. FHA still wins in some files, especially where debt-to-income is tight or where a conventional loan would price poorly for other reasons. HUD notes that the annual premium counts in the debt-to-income ratio used to qualify households, per its announcement on the premium cut. That cost shows up in qualifying, not just in the monthly budget.

Lendmire’s piece Should a Strong-Credit Buyer Skip FHA for a Conventional Loan? covers that purchase-stage choice in more depth.

The existing FHA borrower. This borrower runs a different test. The sunk cost is real: the upfront premium is already paid and does not come back as a credit on a conventional payoff in any way to count on. What matters now is the road ahead. If the original LTV was above 90%, the annual premium runs for the term, so a refinance has a long stretch to save against. If the original LTV was 90% or below, the premium ends after eleven years, and waiting may be enough.

To see where you stand, pull your FHA case-number date and original LTV from your closing documents or servicer. Then estimate current value and calculate LTV. That sequence settles most of the question before any lender is involved.

If you want to compare FHA with other options for your own file, Lendmire’s FHA loan programs page lays out how the program works.

How the Switch Is Underwritten

A conventional refinance is a full new loan. The lender reviews income, assets, credit and debt-to-income. There is no non-credit-qualifying shortcut, and no waiver of the appraisal question.

This is the contrast with the FHA streamline. The loan being refinanced must already be FHA-insured and current, and the refinance must deliver a net tangible benefit. Cash back above $500 is not allowed, and closing costs cannot be rolled into the new streamline mortgage. Streamlines are documentation-light. Conventional is not.

Across the wholesale programs we work with, the FHA Streamline carries no appraisal and a limited credit review, and the premium continues. That is the point. A streamline can lower the payment. It keeps you in FHA, with an FHA premium. It is not a route to conventional.

An FHA payoff with no cash back and no junior liens is typically treated as a rate-and-term or limited cash-out refinance. Take cash beyond the allowed limits and it becomes a cash-out refinance with lower maximum LTVs. Fannie Mae’s limited cash-out page defines the category.

Some borrowers also expect the high-LTV refinance programs to apply. They usually do not. Programs built for high-LTV refinances carry their own eligibility rules and generally require that Fannie Mae own the existing loan. An FHA loan does not fit that.

Break-Even and Hold Period

The right test is simple. Compare monthly savings against total closing costs, then against how long you plan to stay.

Monthly savings come from three places: the FHA premium that goes away or shrinks, the difference in the loan’s payment structure, and any PMI you add. Closing costs on a conventional refinance are full lender and third-party costs. They can be paid in cash, financed, or traded into the loan’s structure. Some “no-cost” offers work by building the costs into the rate or balance. The cost does not vanish. It moves.

Divide closing costs by monthly savings and you get the months to break even. If you expect to sell or move before that point, the refinance loses money. This calculation belongs with a loan officer working from your actual numbers. A generic payback figure does not fit anyone.

Two scenarios show how the inputs interact, described in percentages and words.

• Life-of-loan premium, strong credit, 20%+ equity. The original LTV was above 90%, so the premium would run the full term. The new loan has no mortgage insurance. Savings are largest and the break-even is usually the shortest. This is the clearest case for switching.
• Eleven-year premium, 12% equity, strong credit. The original LTV was 90% or below, so the premium ends on its own. A new loan would carry PMI. The savings are smaller and the premium has an end date anyway. Waiting may beat refinancing.

Timing matters here too. Equity builds from paydown and appreciation, and appraisal variance can swing it either way. Waiting has a cost, because the premium keeps running. But refinancing too early can mean PMI plus closing costs for a small gain. Neither choice is free.

Where the General Rule Breaks

The 20% rule bends in several places. Know these before you run numbers.

• Loans from before June 3, 2013. Older loans follow older cancellation rules that depended on LTV and payment history. The 2013 letter marks the change.
• Original LTV right at 90%. The test excludes the financed upfront premium, so the line is sharper than it looks.
• Subordinate financing. A HELOC or second mortgage raises combined LTV and changes how a refinance is classified.
• Manufactured homes. They carry different LTV limits in Fannie Mae’s matrix.
• High-balance loans. Leverage ceilings are tighter above the baseline limit.
• Recent late payments. The cancellation rules for conventional PMI require a good payment history. Recent lates also draw extra underwriting attention at refinance.
• Second homes and rentals. FHA is a principal-residence program. Conventional loans on other occupancies have lower maximum LTVs, so equity needs change if the home stops being your residence.
• High-risk loans. The 80% and 78% rights do not apply to loans classed as high risk. Those fall under final termination instead, per the CFPB’s exam procedures.

When to Stay in FHA

Strong credit does not always mean leaving. Stay put if any of these hold.

• Your equity is thin and PMI plus closing costs would eat the savings.
• You plan to move before break-even.
• Your original LTV was 90% or below and the eleven-year clock is nearly done.
• Your debt-to-income or reserves would not clear conventional underwriting.
• A streamline would lower your payment and you are content to stay in FHA. Just know it does not end the premium.

Decision Checklist

Run these seven questions against your own file.

1. Do I know my FHA case-number date and original LTV?

2. Is my premium life-of-loan or eleven-year?

3. Is my current LTV at or below 80% with a cushion for a light appraisal?

4. If not, is it in the zone where PMI is workable for my credit?

5. Have I added every lien into combined LTV?

6. Is my debt-to-income and reserve picture ready for full underwriting?

7. Will I stay long enough to pass break-even?

Mostly yes means a conventional refinance deserves a real quote. Mostly no means wait, or stay.

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file.

Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B7-1-01

2. Freddie Mac’s guide

3. HUD Mortgagee Letter 2013-04 (copy hosted by FHFA)

4. CFPB: When can I remove PMI?

5. nahb.org: Conforming Loan Limits

6. Fannie Mae’s limited cash-out page

7. CFPB’s exam procedures