Financing in 19335>Question Details

Jessica, Home Buyer in 19330

Conventional Vs. FHA

Asked by Jessica, 19330 Wed Nov 9, 2011

My husband and I are debating two loans options

The first is a coventional with 10% down, just my name (my score is over 800, his is 665)

The other is with both our names, 10% down, FHA

It appears that the FHA has a lot more fees - do these come off when you meet 20% of principal? Also, what are the pro's and con's if we went the FHA way. Is it just better to pay less money in FHA PMI ($150 for PMI vs $90 for conventional) in order to have both of us on loan and pay a lower interest rate (rate on FHA is 3.75% and on conventional is 3.99%?

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Unless I am missing something, has someone in this thread made the prospective borrowers aware that the FHA MIP (Mortgage Insurance Premium) never goes away?

http://portal.hud.gov/hudportal/HUD?src=/program_offices/hou…

I was very surprised that you were quoted interest rates under 4% in NOvember 2013. I would strongly recommend that you verify the points charges on those loan offers as they are both *significantly* under the current market.

Good luck!
0 votes Thank Flag Link Tue Nov 26, 2013
Ron,
OOPS this question was asked in 2011.....that's when FHA was a little more attractive. Alan
Flag Tue Nov 26, 2013
Alan and George nailed the PMI beast perfectly and Jim tagged the reserve argument so I won't repeat what was already said, however, I do want to add a bit more of an analytical view since I also had to make this same decision.

Your mortgage is a tax deduction with the current tax system, that means your interest rate is really a lot lower than you're paying.

A 200k mortgage at the example below of 3.75% yields an interest payment over the next five years of $35,728 If you divide this into a yearly average, that's $7,145 a year as a tax deduction. Lets say your tax bracket is a conservative, 25% (this would put your income in the 40k range, probably too conservative for this example), that means you'll get back (excluding any other tax liabilities) 25% of this interest which is $1,786. Now lets take $1,786 and divide it by 12 to get a monthly benefit and we come up with $149.

3.75% on a 200k loan is a payment of $926/mo and you're getting a benefit of $149/mo just for owning this home. We now calculate the effective monthly payment (and with that, we'll determine the effective rate) and we get $777/mo. Punching a few figures into my calculator, I find that a 2.375% rate on 200k will yield a $777/mo payment so this tells us we're really financing this loan at a 2.375% rate.

All of that math was to determine if it makes sense to pay down your mortgage or to invest your money in something else. Since I'm not a licenses financial advisor, I can't tell you what to invest in but I'm sure you can find something that will give you a 2.375% yield or better.

As for the initial comparison, we have a simple cost:benefit comparison. The 3.75% mortgage is $28/mo cheaper excluding PMI than the conventional loan but the PMI is $75 and $191.67 respectively. The FHA route is more expensive by $88/mo and you're also adding $2000 to your mortgage for the upfront insurance (technically my payments are slightly low as I didn't take into account the +2k premium but I'm trying to keep the math easy to follow). The upfront premium is a tax deduction as of last year according to my accountant in the year you assess it on a purchase so that $2000 is really only $1,500 in this scenario (remember, 25% tax bracket). So the end result is a combination of the answers below. If you're in a financial position to pay the 10% down and the single premium MI, it's a great idea to go this route. If you're straddling and concerned about your cash reserves, the MI rates are going to be higher with 95% conventional financing and your savings will be greatly reduced over the FHA option (although still a bit cheaper).

Another item to consider is how long you'll live there because your higher priced FHA loan is ASSUMABLE which means you can market your 3.75% rate to prospective buyers down the road to either attain top dollar or a quick sale. Down the road this rate will be extremely attractive to buyers who may be looking at financing the same house at higher rates (Your $926/mo payment now would be $1,135 at 5.5%, any buyer would love to have this rate in a higher rate environment).

Last but not least, if your husband's credit is at 665 and that's causing problems with optimal financing in other areas (credit cards, auto, etc), it may benefit you to put him on the loan to boost his credit over time to get him to a point faster where you can jointly apply for any financing and get the best available rates.

I hope this helped, best of luck to you!

P.S. If this was too analytical, you may also contact me and I can explain in less analytical terms over the phone (or more depending what you're after).
Web Reference: http://RobWeber.com
0 votes Thank Flag Link Thu Nov 10, 2011
Jessica you have had some good answers here; at the end of the day every situation is different and that is why you should seek the advice of your own mortgage broker. Let him know what you are comfortable with and what you want to achieve. Have him run the various scenarios and give you the breakdown of the differences. Many people today use the FHA to avoid putting much down, but remember when you own a home there are on-going maintenance issues and you will need an emergency fund however small in case something breaks in the house like a boiler or hot water heater so don't use all your funds for down-payments and closing costs.
0 votes Thank Flag Link Thu Nov 10, 2011
If 10% represents the bulk of your liquid assets you may consider putting less down and use the FHA loan, it only requires 3.5%. That leaves you with a nice cushion in case of an emergency. Lenders are not much help during a crisis, so protect yourself. Lots of info on my blog, the link it below, hope it is helpful,
0 votes Thank Flag Link Thu Nov 10, 2011
As Alan stated, you have the ability to remove the monthly PMI on the conventional loan with 10% down by paying an upfront fee. The biggest advantage with FHA is that the required down payment is only 3.5%. Since you have more to put down I believe the conventional route makes more sense. With his score over 660 you may be able to use both names on a conventional loan without much, if any, of a penalty.
0 votes Thank Flag Link Thu Nov 10, 2011
As a lender, I recently purchased a home and was faced with same decision you are. Here's my take. Imagine you closed your loan and financed 90% on either a Conv or FHA loan (at this point it doesn't matter) and within the first year of so the prices of homes declined another 5%+. What do you think just happened to your down payment? In this market, I personally recommend putting the least amount down as possible, and using the extra funds that were slated for the down as savings or used for principle reduction. By using a Amortization Schedule you can actually cut the term of your loan by making extra monthly payments and stealing from the bank. Now choosing between a Conv and FHA loan is pretty simple, if you have the money, you can buy out your PMI or choose a split premium. Click on the link below and check out your PMI options. Regarding FHA, this loan is generally for those who do not have a large down payment. It offers the easiest qualifying for those who have less than perfect credit, generally lower rates, and better options for refinancing later down on the line with the Streamline Rate Reduction. Also, HUD can offer a forbearance program for those homeowners in need of assistance. I have seen people go a year without making payments on this program. I would suggest you sit down with Loan Officer and go over the different options, the answer will be surely present itself.

Best of Luck!
0 votes Thank Flag Link Thu Nov 10, 2011
Hello Jessica,

I prefer conventional financing over FHA any more as the PMI on FHA loans has become so expensive

However, what aboutf paying upfront one time Mi. (or Lender paid mortgage insurance). Rather than pay $90 per month for ten years , ($10800) pay approx 1% to 1.4% of the loan amount upfront to remove the MI. If you intend staying in the property for for 10 years you have saved over 9000. Plus every time you look at the mortgage statement you are not going to be upset by seein any monthly PMI.

Best Regards,
Alan Openshaw
Cornerstone Lending
Southampton Pa
267 992 7276
VOTED BEST OF BUCKS 2010
0 votes Thank Flag Link Thu Nov 10, 2011
Get to the bottom line of costs with your Mortgage Broker to see what best works for you. Second party can be added to the deed after the closing if necessary.
0 votes Thank Flag Link Wed Nov 9, 2011
I think if you have 10% down conventional is probably the better way to go. FHA has 1% up front MI and with 10% down 1.05% monthly MI. Conventional loans don't have any up front MI and if you have a good credit score the monthly MI should be only about .45%. But FHA interest rates tend to be slightly better, but I think you are still much better off with the lower MI.

Also, conventional MI goes away after 2 years and if the loan is paid down to 78% of the original purchase price. FHA you need to wait 5 years + 78%.

Conventional loans have higher credit score standards and stricter debt-to-income ratios though as well.
0 votes Thank Flag Link Wed Nov 9, 2011
The more you can put down the better! The sellers, if there are multiple offers, will be wanting to go with a buyer that has the best chance of following through on the deal. You will have more flexibility on your appraisal, if there are repairs needed, you are in a better situation, you will have a lot more opportunities with fixers and cosmetic fixers, if you can put more down. Best, Terry Bell, Realtor, Santa Rosa, CA
0 votes Thank Flag Link Wed Nov 9, 2011
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