# At what rate does it not make sense to NOT get a FHA loan if you are trying to buy a house which down payment exceeds US\$ 417K ?

Asked by Mel, Sunnyvale, CA Wed Oct 26, 2011

I'm trying to do my homework and understand why FHA loans are not better than conforming loans. Lets say your house's price is X. Lest assume 80%*X > US\$ 417K. You can go two ways:

A) Get a conforming loan: pay X - US\$417K as a down payment and borrow the rest at, lets say, a 4.5% APR
B) Get a FHA loan: pay 20%* X and borrow the rest at, lets say, 4.125% APR 1% of PMI

Wouldn't you be better off going with (B) and getting the difference between the down payment of A and 20% *X and applying it to an investment that pays more than 1% of interest per year (which is reasonably easy to find) ?7

To be more concrete. Lets say that X = US\$ 570K.

In (A), you'd be putting down US\$ 153K (570K - 417K). Lets say that in (B) you put down 20% = 113K. The difference between the down payments here is of 40K. Assuming that you can make the \$40K pay off more than 1% a year, isn't it smarter to go with the FHA ?

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, ,
Thu Oct 27, 2011
Hi Mel,

With an FHA loan in Santa Clara county, you can buy a home for up to \$625,500 with a down payment of just 3.5%.

Compare the difference in your monthly payment for a conventional loan with 20% down vs FHA with 3.5% down. Then take the difference in the down payment and divide that by the monthly savings to get your break even point.

Here's an example:

Purchase price = \$570,000.

Conventional down payment of \$153,000 = \$417,000 loan amount at 4% = a PI payment of \$2,010.73 per month.

FHA down payment of \$19,950 = \$550,050 loan amount at 4% = a PI + mortgage insurance payment of \$3,184.68.

Difference in down payment =\$133,050 divided by the difference in monthly payment of \$1,173.95 = 113.33 months or 9.44 years. So you're paying an extra \$133,050 upfront, right now, to save \$1,173.95 each month for the next 9+ years. Something tells me you can probably find a better investment .
1 vote
Robert Lei, Agent, Cupertino, CA
Wed Oct 26, 2011
Also, I like how you are being detailed and calculating everything. And since you got this far, we might as well go all the way and put it into an all-encompassing spreadsheet...complete with all the interest rate scenarios, so we can compute after which years which of those scenarios is the best case, etc. You'll find if you sell after only a few years, then one type of loan is best, but if you hold for a longer term another one comes out on top.

By the way, I was a state math champion in high school and scored an 800 on my math GRE, so I'm pretty good with numbers :-)
1 vote
, ,
Thu Oct 27, 2011
Mel, if you have 20% down the only time it would make sense to go FHA is if you have a low credit score.

Happy funding, Rudi
Web Reference:  http://www.umboc.com
Andrea Wince…, Agent, Milpitas, CA
Thu Oct 27, 2011
Karen Parsons…, Agent, Laguna Beach, CA
Thu Oct 27, 2011
Mel,

You are way ahead of the game in terms of understanding lending. I'm just here to chime in on Deborah...Dee Dee. I use Dee Dee for many of my clients and she is great. She has access to all the programs available and has great ideas.

I would recommend that you contact her and start talking about options. :)

Good luck with the loan,

Karen
, ,
Thu Oct 27, 2011
Mel, I think you need a third option: A conforming loan with private Mortgage Insurance. You can put 5% down. The advantage of private mortgage insurance over FHA is that the payment is substantially lower and it only remains on the loan until the loan to value reaches 80% and/or two years. I use Mortgage Coach Edge to give you a complete comparison of your different options over time. Much easier to let the numbers speak for themselves.
Norman Aless…, Agent, San Jose, CA
Thu Oct 27, 2011
Mel,
Another factor you have to realize now is that certain properties that you may be interested in would NOT qualifiy for an FHA loan so my advice to you is, if you can get a pre-approval for both types of loans that way you can pick and chose. Also work with an agent and lender that has done many FHA loans. The lenders are getting tighter and tighter on what they require in or to under write a loan. ( FHA or comforming loans). It is very good that you are working this all out now, it is the best way to do it.
Feel free to contact me with any questions.
Allyson
408-705-6578
allyson@homesbyallyson.com
DRE# 01397256
Terri Vellios, Agent, Campbell, CA
Wed Oct 26, 2011
FHA was designed to help people who may not have a large down, perhaps FICO scores are lower, and debt to income ratios tighter. In order to compensate that you pay PMI up front and monthly. Please discuss with your tax adviser what deductions work for you, I had heard that PMI is not a deductible expense, where interest has been (this is not tax advice).

In addition to your calculations, focus on your goal. Is it to keep your payments down, increase your equity, repay your loan? In Real Estate the advice is to use other peoples money and leverage your own money. So the deciding factor is going to be personal.

All the best to you.
Web Reference:  http://www.terrivellios.com
Robert Lei, Agent, Cupertino, CA
Wed Oct 26, 2011
Hi Mel,
If your main reason for concluding FHA is better than conforming is you get to keep and invest a greater amount, then why not go even further down to a 3.5% down payment instead of 20% down?

With FHA you can put 3.5% or 20% down. But with FHA no matter how much you put down , you have to pay Mortgage Insurance (MI). No matter what, you'll have to pay MI for a minimum 5 years or 78% Loan to Value (LTV) whichever comes later.