Financing in Washington>Question Details

Anon_20009, Home Buyer in 20009

My question is related to the FHA vs. Conventional loan.

Asked by Anon_20009, 20009 Sun Mar 28, 2010

I am a first-time buyer (28 y/o) with enough cash to put 10% down on a $350k house in Washington. I'm trying to decide whether to go with Conventional 10%, Conventional 5%, or FHA (anywhere from 3.5% to 10% down).

I'd planned on using conventional financing at first because the rates for FHA were higher, not to mention the MI monthly premium and the 1.75% upfront financing of MI. But now the rates are equivalent for each option. My lender has offered a few options:

* Conv 90%: 5.0%, PMI monthly premium NOT required by paying 1 point on the mortgage.
* Conv 95%: 5.0%, PMI monthly premium NOT required by paying 2.25 points.
* FHA 96.5%: 5.0%, negative 0.25 points paid at closing, approx $155/mo MI premium.

In addition to the interest/PMI paid on each loan, I'm trying to consider the value of saving the cash to invest or finance renovations, the future assignability of the FHA loan, and the security of not blowing my entire nest egg on the down payment. Any suggestions?

Help the community by answering this question:


It sounds like this is not going to be the property you live in for the next 20 years but more likely for the next 5. If so, I suggest you use as little of your own money as possible. In other words, what is the least expensive short term option for you? Don't look at what this loan would end up costing you in 10 years unless you plan to still own the property in 10 years. You might even want to consider a 5 year arm to keep your monthly costs down.

I hope this helps. Let me know if I can be of further assistance to you and good luck with your first home purchase!
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0 votes Thank Flag Link Sun Mar 28, 2010

Your best option is the FHA loan. Here why: On average, 1st time home buyers typically stay in their home 5 years or less. Also, this market is still declining and most predict it won't turn around around for another 2-3 years. If so, and depending on your specific market, you could loose anywhere between 10-40% of your initial down payment and home value. Significant losses either way if you're in the home for 7-10 years, let alone 5. That said, its wiser for you to put the least amount down and pay no points. Furthermore, even though you're paying 310 more a month (18,600 total in 5 years) over the Conv 95% loan, when you add the 18,600 with your 16,100 down payment (34,700) you're still saving 8,200.00 (34,700 - 42,900) in over all costs. A significant savings that will only increase if you wind up selling your home in less than 5 years.

Next, unlike Conventional loans, FHA loans are also assumable. Given how low rates are now and the likelihoond they'll be a lot higher 5 years from now, this will be a strong selling incentive for prospective buyers. Even if you were putting 20% down Conventional, your FHA interest rate should still also be .25 to .50 lower than the Conventional rate. As a rule, even though you're putting less down, FHA rates are typically always equal to or lower than Conventional rates.

Lastly, MIP, like the interest on your loan, is a tax write off. I hope this is clear and helpful.
1 vote Thank Flag Link Sun Mar 28, 2010
And you would be left with a $100.00 in the bank. I wouldn't take that route unless this was a long term investment. So FHA will cost you $300 more a month. So that's $3,600 x 5,,,around $20,000? So if you took that amount out of your account every month instead of using it all upfront, what would it leave you at the end of those 5 years? Then consider that if your making a good investment, it will increase in value and you may make some if not all of that back. Also, check out the FHA arm, it will lower those monthly payments.
1 vote Thank Flag Link Sun Mar 28, 2010
Hello, Conventional loans with less than 20% down will have PMI - Is he giving you an 80/10 two loans to avoid the PMI going conventional?

What are the Total Monthly Pymts for each scenario and I can help you figure out which will be best. IF the payments are not too far off, and depending on your asset situation, I would recommend going with the lowest out of pocket scenario.

It is always a good idea when buying a new home to have liquid assets left over, you don't want to buy a home and put most of your savings as a down payment. You should have at least 6 months mortgage payments left over in savings, and depending on the age and condition of the house leave yourself a repair fund as well... Let me know the payments and I can further give my opinion.
0 votes Thank Flag Link Mon Sep 27, 2010
I would definitely pay the 10% option.
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0 votes Thank Flag Link Mon Sep 27, 2010
Did you know that if you could come up with 20% down you would avoid PMI and MI. If thats not possible I would hae to go with option 1. Good luck and I hope you enjoy your new home.
0 votes Thank Flag Link Mon Aug 2, 2010
Personally, I would go with the first option, putting down 10% with no PMI
0 votes Thank Flag Link Sat Jul 31, 2010
I'd go with the 10% down personally if I planned on staying in the home for a while...less in interest over the course of the loan.
FYI being a first time homebuyer in washington you may be eligible for the DC first time home buyers tax credit. It is a $5,000 credit for those who qualify.
Good luck!
0 votes Thank Flag Link Tue Jul 27, 2010
Hey everyone, FHA has a really attractive 5 year ARM product right now with rates in the 3's! Mark J Scott at Suntrust offers it. There are annual and end caps that make it a great choice. Suntrust also has their own FHA approval process for non-FHA condos and that has been a huge help for my clients.
I like the FHA product and with rates in the 3's it's hard to pass up!
Great breakdowns, btw, Lew and Rudy : )
0 votes Thank Flag Link Fri Jul 23, 2010
Personally, I would go with the first option, putting down 10% with no PMI

Have you found a house yet? If not, please check out 512 Rittenhouse NW which was just listed for $329K. It is renovated, so you can still decide to go FHA if you so choose.
0 votes Thank Flag Link Tue Mar 30, 2010
One more thing, since I didn't post the date. The FHA premiums increase on April 5th (Monday) 2010. This is why the case number must be ordered this week.
0 votes Thank Flag Link Mon Mar 29, 2010

Lots of very good answers here, so I'll only drop a couple of things that have not been mentioned yet.

First, and I want to point this out IMMEDIATELY. FHA is raising their upfront premium to 2.25%. The only thing you need to do to protect yourself from this increase is have your lender order a FHA case # by this Friday. It is only specific to a property, so this will only work if you know which property you're looking to buy. If you know which house you're buying and your case # has not been ordered, please make sure this is done NOW.

Next, Evelyn made a great recommendation about considering an adjustable rate loan. It's very important that you understand not only what your current rate is and how long it's fixed, it's also important to evaluate what your rate can adjust to and what determines the new rate. This is SO important.

What major difference between conventional and FHA loans are the adjustable rate mortgages. FHA ARM's usually have a 1% periodic and initial cap adjustment which means that JUST IN CASE you keep your 5/1 loan beyond 5 years, the rate can only move 1% a year. This makes a FHA ARM at 4% safe for 6-7 years. To read more about ARM's, read this blog post I posted. The case study I used was a FHA ARM:…

Next, you mentioned you were considering investing money into the property. One thing I noticed is that nobody has mentioned a FHA 203k loan. This is a loan where you can rehabilitate the property either as a purchase or refinance, thus rolling the costs into the loan. I would also look into this. Here is another post about 203k loans written by another author:…

Lastly, after recommending a 5/1 ARM, there is a question out there regarding assumability. Of course, a low fixed rate is more desireable to assume than an ARM, so take that risk into consideration.

There are many factors to consider when comparing loans and I could write all day long, but I wanted to touch on just a few major things that have not been mentioned.
0 votes Thank Flag Link Mon Mar 29, 2010
The simple answer is that you need to do what makes you most comfortable, and it sounds like everyone here is in agreement that FHA makes the most sense.

The more detailed answer: you are buying the home for a given price, ie: $350,000 and using financing as a tool to cover the difference of the sales price vs. downpayment (you don’t loose the money you put down, its simply tied up in an asset). No matter what the market does, that home is yours for the price you bought it for.

In order to get financing, MI, paying interest on the less amount down, or interest rates, are the only things I would count as a “net loss” when comparing loans in your scenario, calculated out over the x number of years you plan to keep the property.

To throw a curve-ball in the mix my bank is offering 80/10/10 loans, aka, put 10% down you won’t have MI, so if you go the 10% down route, an 80/10/10 is the best option.

Since you are under contract you will still qualify for the first time homebuyer tax credit, assuming settlement is before June 30. DC also has their own first-time homebuyer tax credit for up to $5,000 but you can’t claim both.

Just an FYI that the FHA UFMIP for FHA increases to 2.25% after April 5, so make sure your lender has ordered a FHA case number by then. Give me a call if you want me to run numbers.
0 votes Thank Flag Link Mon Mar 29, 2010
In this case, your best option is the FHA loan.

For a conventional loan with 10% down, at 5% interest, your monthly P&I payment will be $1691, and your monthly PMI premium will be $182, for a total of $1873/mo.

For a conventional loan with 5% down, at 5% interest, your monthly P&I payment will be $1816, and your monthly PMI premium will be $227, for a total of $2043/mo.

For an FHA loan with 3.5% down, at 5% interest, your monthly P&I payment will be $1845, and your monthly PMI premium will be $155, for a total of $2000/mo.

With an FHA loan, you'll pay less per month with 3.5% down than you will with a conventional loan at 5% down. You will pay $127 more per month with an FHA loan than you will with a conventional loan at 10% down, but you will save $22,750 in capital. It will take you 180 months (or 15 years) to draw off that $22,750 to make up the difference in monthly payments. You can retain that capital for future emergencies, for investments, to make improvements in your new home, or for whatever you need it for.
0 votes Thank Flag Link Mon Mar 29, 2010
I agree that the lower downpayment for FHA is a great advantage. The bottom line with going FHA is that the house you purchase should be in very good condition. FHA is very strict with their appraisal and will require that any necessary repairs be done before settlement. For instance, they will not allow any peeling paint. If you want a fixer-upper, most likely a conventional loan will be the better choice. I have had clients go with FHA for the most part, as long as the repairs needed are not extensive.
Linda Funabashi/Realty Pros
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0 votes Thank Flag Link Sun Mar 28, 2010
I agree with Evelyn, I would not go "all in" especially considering that the FHA fixed is only 5%. It is good to have cash reserves and not so good to be house poor. The adjustable rate loans may also be something worth considering provided that they provide meaningful reduction of the monthly payment vs a fixed rate loan.
0 votes Thank Flag Link Sun Mar 28, 2010
Consider the following blogs.

Does it make more sense to rent or to buy? Read it, look at the amortization table. See the real costs involved. It could be shocking to you.…

Below is a blog saying why renting at a higher price than buying could be your best option. Definitely not what most people consider.…

It is how to look at a short term buying verses renting scenario just by numbers. I hope it helps.
0 votes Thank Flag Link Sun Mar 28, 2010
Thanks for your input so far! So to provide some more information, I will most likely be in the house between 4 and 7 years. I already have a place under contract and am able to choose whatever option works best for me (FHA or conv) without impacting the settlement. So here's a breakdown of costs to move in/monthly payment:
--FHA: $2305/mo, $16,100 at closing
--95% conv: $2,090/mo, $29,700 at closing
--90% conv: $1,995/mo, $42,900 at closing

To give you an idea of my finances, the total value of all cash in my accounts is $43k giving me a cool $100 left over the first month, but at least the month after I'd save an extra $300 over FHA, $100 over 5% down. Keeping in mind I'll only be here ~5 years, what do you think of these options?

Thanks again!!
0 votes Thank Flag Link Sun Mar 28, 2010
One key consideration. In todays market loans get considered as
0% down dead last.
3.5% down almost last
conventional mortgage second place
cash, top billing and most wanted.

It is always nice to have extra money available to cover problems that eat money when they occur. Furnace and transmission repair or replacement comes to mind.

You also need to cover closing costs.

If you have any job security concerns, it is probably better to rent for awhile. If not, just have a cash cushion to cover some problems just in case.
0 votes Thank Flag Link Sun Mar 28, 2010
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