It sounds like you are very aware that unless you put 20% down, you will be paying Mortgage insurance, whether it is an FHA or non-FHA loan.
As part of my post to your question above: I highlighted the benefits of the FHA program. What you should also be aware of is that while FHA only requires a 3.5% down payment this means you may be financing up to 96.5% of the sales price and you will have to pay Mortgage Insurance for a MINIMUM of 5 years, or until you have paid your original LOAN AMOUNT down to 78% (not that the loan amount is 80% of current market value, which is typical for non-FHA MI removal). Given the year ahead of us, this might be less costly than down-payment equity loss during 2009.
The FHA "78% or 5-year Rule" before Mortgage insurance can be terminated is covered here: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi
While additional money down over the standard 20% will get you a better rate, the 25% to 30% down payment amount you have been hearing about is really much more important for investors. For example, I recently saw a rate sheet that listed a 3% lender fee for investors not putting down 25% or more.
Assuming you have to buy right now and are not in a position to wait, I would personally consider a mixed financing strategy of starting with an FHA loan (at a min down of 3.5%), and then possibly refinancing at a later time. Here's why:
If housing trends continue (downward as I suspect they will at least until Q209 and probably longer), the market will evaporate any additional equity you pay in over the 3.5% down. With California's unemployment rate topping 10% and the global economy contracting, cash reserves are important from a financial security perspective these days. This situation will come to pass. When the market improves, and you are able to benefit from market-based equity appreciation, you can look to refinance out of the FHA loan into a non-FHA loan product that recognizes market equity in calculating whether MI is required) thus removing the MI cost. There is some â€œrate escalation riskâ€ associated with this strategy of refinancing out of the FHA loan and moving out of the FHA loan has to make financial sense; however, assuming the minimum down of 3.5% is used you have 16.5% sitting safely in the bank using the FHA loan (of course you kept this unscathed in an interest bearing account). These protected dollars can now be employed to buy down the interest rate of any subsequent non-FHA loan product or used to pay down your original loan amount to the 78% level! By the way, FHA refinances (appropriately termed â€œStreamline refinancesâ€) are very easy.
If you do go to my profile page you will see that I am also a Certified Mortgage Planning Specialist and Mortgage Broker besides also being a Realtor. If you are looking for "straight-talk" regarding FHA loans consider me a trusted source. Although I am a Mortgage Broker certified in FHA financing, I do not personally provide FHA financing services. I have two excellent FHA referrals if needed (please shoot me an email offline if interested).
I live/work in Fremont, and I know that buying in the current market can generate a slew of questions due to all of the "unknowns." So, I would like to extend an invitation for us to meet over a coffee to chat, just a live Q&A opportunity, no obligation on your part and no pressure on my part. You bring the questions. Iâ€™ll bring the answers.
If you have 20% you will be in good shape if your score is good (over 740) Talk to a local Mortgage guy - STAY OFF THE INTERNET- for your loans.
Hope this helps and good luck....Dan