FHA vs. Conventional loan

[dja4260]

First time home buyer. 2 flat house, will be renting out top unit.

What is better for me as I've been approved for either.

790 Credit score
17k in my savings
FHA 3% down
Conventional 5-7% down

I've not gotten into interest rates but should qualify for best available.

Property will be lived in for 4-6 years, then I'll rent out main level as well. In the future when the market picks up, I'd like to sell. I'm thinking of this as an investment.

The top unit rent alone covers the mortgage/taxes.

Thanks,

 

[JHZR2]

uggggh...

Can you afford the payment if it is not rented? You say the mortgage is covered by rent, but if youre not renting is the burden too high on you?

I'd want to have as much down as possible. 3-7% constitutes high risk and likely gets you a worse rate. If youre pulling enough with one unit, but had more down, you would put more to principle each month.

Which gives the better rate?

 

[dja4260]

Yes I can cover the payment with ease if not rented.

I don't have the exact rates but both were options at my pre-approval.

 

[Donald]

It use to be PMI was required if less than 20% down.

 

[dparm]

I would seriously reconsider a small downpayment like that. Wait another year or two until you can do 10%+.

 

[dja4260]

Originally Posted By: dparm
I would seriously reconsider a small down payment like that. Wait another year or two until you can do 10%+.


You pay mortgage insurance until 20% so that 3,5,10% is irrelevant.

I'd put extra monthly ($3-500) towards principal.

 

[Coprolite]

If you plan to be a landlord, I would save the extra money for emergency fixes in the short term until you get in the groove. This would also keep the budget healthier if you can't rent right away. You can always pay more into a mortgage to reduce principal owed. It is a bit tougher to pay less and keep the home.

 

[rjundi]

The main issue I understand with FHA is that the mortgage insurance that is akin to PMI with conventional does not go away when 20% equity or whatever thresehold it hit. It remains in for life of loan.

 

[JHZR2]

Ouch. No way I'd use the FHA then.

 

[dparm]

Originally Posted By: rjundi
The main issue I understand with FHA is that the mortgage insurance that is akin to PMI with conventional does not go away when 20% equity or whatever thresehold it hit. It remains in for life of loan.



Didn't know that. I agree -- 20% or don't do it.

 

[dja4260]

I was told by my mortgage broker (family friend) that lenders must cancel the PMI automatically by law, when borrowed balance hits 78%.

PMI in this case is $650 annually, or $55 per month tacked on to the mortgage.

I can't see that being a deal breaker. I can put more $$$ down, but don't feel the need to empty my savings. In the end I'll owe
Why Dparm are you stuck on 20% down?

BTW I work on Main & Madison in Lombard.

 

[itguy08]

Originally Posted By: rjundi
The main issue I understand with FHA is that the mortgage insurance that is akin to PMI with conventional does not go away when 20% equity or whatever thresehold it hit. It remains in for life of loan.


Ouch. We got hit with PMI (which, IMHO is a scam for those that are close) $40-something for 2 years as we were at 18%, IIRC. Since I'm paying extra principal they estimate we'll be rid of it in another year. I would hate to be paying 20-30 years of PMI.

In our case I'd rather pay the $1k than take the $$ out of savings. I'd rather have the cash on hand for unforseen expenses and pay the principal down as quick as possible to get out of PMI. That way if something happens you can cut your payments back to the normal rate and be OK.

 

[Cujet]

I asked advice from my billionaire-boss' accountant. A very high powered guy.

The answer:

1) Go conventional in everything you do. Don't involve any government programs, don't go with a high risk loan, don't go with a minimal deposit loan (such as the common 5% ones that were available)

2) Do the business with a local bank, not Bank of America and find one that does not sell it's loans.

3) Configure the loan so you don't have to pay PMI or escrow. Do it yourself.

Whew! That was great advice. I followed it and am SO GLAD I did. For more reasons than I have time to explain here.

 

[PandaBear]

Originally Posted By: Cujet

2) Do the business with a local bank, not Bank of America and find one that does not sell it's loans.


Good luck on that one. The rate would not be good. What is the reason for finding a bank that will not sell your loan to others? They cannot change the term of your loan after it is signed.

 

[Mr Nice]

Are you still leaving for the military , how will you keep on eye on your house ?

 

[dja4260]

Originally Posted By: LT4 Vette
Are you still leaving for the military , how will you keep on eye on your house ?



Significant other, female friend of ours, and our puppy. Our parents live within 6 miles and both our fathers are lifelong construction contractors/handy.

I'll be gone for 10 months and figuring out the paperwork next week.

 

[Virtuoso]

We have an FHA loan and our PMI will drop once we're 20% in.