Conventional Loan vs VA Loan for an FHA Borrower With Equity

The Quick Read: A conventional loan fits an FHA borrower who has solid equity, decent credit, and no VA eligibility. A VA loan fits the borrower who holds a valid Certificate of Eligibility and wants to stop paying monthly mortgage insurance. Both options replace the FHA loan with a new one. Both need full underwriting, an appraisal, and new closing costs. Which one wins depends on eligibility, how much equity the home holds, and whether you take cash out.

Side-by-Side

The table below compares the two paths for an owner-occupant paying off an existing FHA loan. Agency limits come from public sources. Your file may land lower, depending on lender guidelines and full file review.

Why an FHA Borrower With Equity Is Looking at This

FHA insurance has two parts. HUD Mortgagee Letter 2023-05 is HUD’s mortgage insurance premium schedule notice, and it covers the premium structure for FHA loans. Across the wholesale programs Lendmire places FHA files with, the upfront premium is 1.75% of the base loan, usually financed. The annual premium is separate. It sits between 0.15% and 0.75% of the balance depending on term, amount, and LTV. On a thirty-year loan above 90% LTV, it lasts for the term. At or below 90%, it ends after eleven years. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

Here is the catch. The premium duration follows the original LTV, not the balance you owe today. Equity you built over the years does not shorten it. That is why a borrower with real equity starts asking whether to leave FHA.

Paying off an FHA loan with a non-FHA loan ends FHA mortgage insurance. Refinancing FHA to FHA does not. The FHA streamline is a fine tool in some files (it skips the appraisal and keeps a limited credit review), but the premium continues. This article covers the two exits.

If you want the FHA mechanics in full, Lendmire’s page on FHA loan programs lays them out.

How Mortgage Insurance Works on Each Side

Conventional PMI can come off. The federal consumer-finance regulator explains that a borrower can ask the servicer to cancel PMI when the balance is scheduled to reach 80 percent of the original value. The OCC’s consumer site adds that PMI must be cancelled automatically at 78 percent on the original schedule when the borrower is current.

Those rights cover private mortgage insurance. The federal consumer-finance regulator’s examination procedures for the Homeowners Protection Act indicate the law’s scope does not reach FHA or VA insurance. Many borrowers assume paying FHA down to 80% removes MIP. Generally it does not.

VA works differently. VA News describes a one-time funding fee on VA-guaranteed loans, with no monthly private mortgage insurance. The fee for first-time purchase borrowers is typically 2.15%, and up to 3.3% for subsequent use. That is the purchase framing. For a refinance, check VA’s current funding-fee table. Some groups are exempt, and a lender can confirm whether you are one of them.

One more point on cost. Conventional loans can carry loan-level price adjustments that depend on credit and leverage. FHA and VA loans are excluded from those adjustments. So “no program fee” on a conventional loan is not the same as “no extra cost.”

When Conventional Is the Better Fit

Conventional wins in these situations:

• You are not VA-eligible. No Certificate of Eligibility, no VA loan. The comparison ends there.
• You have substantial equity. The more equity you hold, the less PMI matters. At lower leverage, PMI may not apply at all, depending on the lender’s guidelines. A cleaner insurance picture is the main reason a borrower with equity leaves FHA.
• You want a no-cash-out refinance that only pays off the FHA loan. Conventional guidelines generally treat that as a limited cash-out transaction, and they typically allow higher leverage on a one-unit primary residence than they do for cash-out.
• You want PMI that can later be cancelled. If your leverage is high at the start, PMI is a cost with an exit.
• You want to avoid a funding fee. Conventional has no program fee, though PMI or price adjustments may apply.

Conventional has limits. Fannie Mae’s agency ceiling for a cash-out refinance on a one-unit primary residence is 80%. Two-to-four unit homes drop to 75%, and manufactured housing is lower still. These are agency limits. A lender may set tighter ones.

Picture a homeowner who bought with 3.5% down on an FHA loan and has since built meaningful equity through payments and appreciation. No veteran status in the household. A conventional refinance is the natural route here. The question is only whether the new LTV lands where PMI is small, or gone. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

When VA Is the Better Fit

VA wins in these situations:

• You hold a Certificate of Eligibility. VA’s home loan page says it can be obtained through a lender, VA.gov, or by mail.
• Your equity is modest. VA’s ceiling on a cash-out loan is 100% of reasonable value, including financed fees, per VA’s lender-call material. Conventional cash-out tops out at 80%. For a borrower who wants cash and has less cushion, VA reaches further.
• You want no monthly mortgage insurance. The funding fee replaces it as a one-time charge, which can generally be financed.
• Your credit or income profile is thin for conventional. VA still requires satisfactory credit and enough income to cover the expected monthly obligations. It does not waive review.

VA has its own friction. A cash-out refinance of a non-VA loan into VA needs more than a payoff. VA’s rules require at least one net tangible benefit to the veteran, plus a comparison disclosure at application and again at closing. Seasoning may apply, and fees must be recouped within a set period. VA material also describes the loan as a Type 1 or Type 2 depending on whether the new loan exceeds the payoff amount. These details change, so a lender should confirm them against current VA guidance.

Two corrections to common assumptions. First, the VA IRRRL, the streamline most veterans hear about, applies to existing VA loans. It does not replace an FHA payoff. Second, the VA does not lend the money. The CFPB notes that VA loans are underwritten, closed, and serviced by private lenders. The VA guarantees part of the loan.

Now consider a veteran with an FHA loan, a single-family home, and limited equity who wants cash for repairs. The conventional cash-out ceiling may not reach far enough, while a VA cash-out refinance might. The net tangible benefit test would still have to be met.

Both Options Share the Same Plumbing

Neither route is a simple swap of insurance. Both create a new loan with a new term and new closing costs. A lower balance does not automatically follow, and financing fees or costs raise the balance. Run the break-even in plain terms: what you pay to refinance against what you save each month, and how long you will stay.

Files on either path run into the same preventable gaps:

1. Appraisal value against payoff. If value comes in light, the leverage you planned on shrinks. On a conventional file that can push you into PMI. On VA, it tightens the 100% ceiling.

2. Payment history on the FHA loan. Lenders review it. Recent late payments hurt either path. Exact lookbacks vary by lender.

3. Occupancy. Both programs are built around the home you live in. Occupancy changes the leverage limits, and a second home or rental sits outside both paths.

4. Unit count. FHA allows one to four units. Conventional leverage tightens on two-to-four unit homes. Know your unit count before you pick a path.

5. Entitlement. On the VA side, prior use of entitlement can matter. A lender confirms what you have through the Certificate of Eligibility.

When to Do Neither

Staying put is a real answer. If your FHA premium is nearly finished, or your equity is thin, or the closing costs would take years to earn back, the refinance may not help. An FHA streamline is another choice. It skips the appraisal but keeps the premium going, so it only fits when your priority is the new loan terms.

VA says a refinance must show a net tangible benefit for the borrower. That is a sound test even outside VA. A refinance can be legal and still not help the household.

Key Terms Defined

Certificate of Eligibility (COE): VA’s document confirming you qualify for a VA-guaranteed loan.

Funding fee: The one-time charge on a VA loan that stands in for monthly mortgage insurance.

Limited cash-out refinance: A conventional refinance that pays off the existing first mortgage and closing costs, with little or no cash to you.

Net tangible benefit: VA’s test that a cash-out refinance must give the veteran a real, measurable gain.

PMI (private mortgage insurance): Insurance on a conventional loan with low equity. It can be cancelled once equity builds.

Upfront mortgage insurance premium (UFMIP): The one-time FHA premium, 1.75% of the base loan, usually financed into the loan.

A Balanced Verdict

If you are not VA-eligible, conventional is the path, and equity is what makes it work. The more equity you hold, the cleaner it gets. If you are VA-eligible, the choice comes down to cash and cushion. Modest equity or a cash-out need points toward VA. Strong equity and no cash-out need make the two closer, and the funding fee against PMI becomes the comparison to run on your own numbers.

Neither answer is automatic. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

Borrowers who have used VA entitlement before can read Lendmire’s piece VA vs. Conventional vs. FHA Loan When a Veteran Reuses Entitlement. For the same three-way comparison from the purchase side, see Lendmire’s first-home comparison of VA, conventional, and FHA loans.

If you hold an FHA loan with equity and want to see whether a conventional or VA refinance fits your file, Lendmire can help you compare the options and what each one asks of the file. To start, request a scenario review with Lendmire.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2023-05

2. CFPB Ask CFPB: removing PMI

3. OCC’s consumer site

4. CFPB Homeowners Protection Act examination procedures

5. VA News: Funding fee, who pays and who is exempt

6. VA’s home loan page

7. CFPB