Do I go with an FHA or Conventional Loan?

Question

Hi guys, I am new to BiggerPockets and new to real estate investing. I am a college sophomore looking to buy a house for me and my three roommates to live in next year. I plan on house hacking with them paying down the mortgage every month. However, I have not decided on if I should go with an FHA loan or a conventional loan. I have more than enough to put down a 20% down payment, but I am wondering if I should still go with an FHA loan so I have less money into the property. This would allow me to also buy another property with a conventional loan later this year to start renting out. So my question is, Should I go with the FHA loan or go through a conventional loan? Thanks guys!

Jeff Brower · Answer

If the property you are looking for is relatively cheap, use the conventional. Save your one FHA opportunity for the largest/most expensive home you can get into. I always advocate to find a nice 4 unit so you can leverage as best as you can with the 3.5% down. Its all about leveraging the cash you have on hand in the best way possible. Be patient.

Al Diaz · Answer

I don’t see enough information here to be able to render any specific recommendation, but my answer is the following: it depends.

How is the market in the area you are looking to purchase in? Is it hot, competitive? Are homes going for significantly over ask?

How creative can you get to ensure that any offer that you place with an FHA will be more enticing than one via conventional lending? Have you spoken to any investors/flippers in your area to gauge who is buying their homes, and what financing method folks are using?

Lynn McGeein · Answer

@Al Diaz is correct, a 20% down conventional offer is likely to be taken more seriously than a 3.5% down FHA offer by a seller in a multiple offer situation. They do have lower down payment conventional products as well, which may be less expensive than FHA. Find a good lender who can discuss your actual situation and provide actual costs involved on both based on your max qualification so you'll know what to expect. They should be able to do it without a hard credit pull. You say you're a student, so not sure where your income and credit level lies, but that will make a big difference in loan type as well. My son thought he could buy right after graduation, renting out rooms to his college roommates, but found he needed longer term of proof of income in his field to qualify, even working for the same company he had his college internship with, and not having established much credit, he ended up with FHA when he did buy.

Andrew Powers · Answer

You can get best of both worlds with the first time home buyer 3% down conventional loan (for single family properties only). Call around to local lenders to see if they will do it. Conventional is stronger than FHA, and low down payment allows you to conserve cash for repairs or your next property.

Alot of people don't realize this is an option as everyone talks about FHA being the only low DP loan

Griffin Schermer · Answer

I would take advantage of the FHA 3.5% down first time home buyers loan. There's benefits and drawbacks to every kind of loan, but this is a great way to get started! It will also give you the ability to recapture the money you put down quickly to then go do your next deal. If you've got 3 roommates paying down your mortgage I'd see if I could get any of them to help you fund your next deal. Then you'll be setting yourself up with the ability to maybe do a bigger deal, or put yourself in a situation to touch less of your own capital. You'll have extra for reserves and spread the risk beyond yourself. This sounds like a great opportunity.

Jinhee Hann · Answer

@Drew Zaruba

Always try conventional before Fha since fha had higher mortgage insurance premiums monthly and it’s for life. Unless you refi out of it.

Conventional loans allow little as 3 or 5% down so it’s competitive with fha.

The real super advantage of fha is when you use it to purchase 2-4 unit property as owner occupied (fha only does primary residence so it’s best to do it as a first property), you can still do 3.5% down with fha whereas conventional will require 15-25% down for multi unit properties even for primary residence.

Drew Zaruba · Answer

@Andrew Powers I did not even realize that was an option. I will definitely call around and see what offers I can get. I appreciate your help!

Drew

Do I go with an FHA or Conventional Loan?

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