should I put down a 20% down payment to avoid mortgage insurance?

Question

Hello, BP

I'm looking to invest in a duplex in st. paul MN.  I plan to live in one unit to obide by any owner occupant requirements but im debating if i should just go with a FHA loan at 3.5% down payment but I hear you can save alot in the long run by putting down a 20% down payment.  If i do a 20% DP then i wont have much for any rehab or updating that needs to be done. what option have you guys done and what are the pros and cons going either way? thank you guys for being so helpful on this site

Thanks, Jon Rylander

Simon Campbell · Answer

Sure that works on any other loan but not anything underwritten by FHA. Their new policy is that the mortgage insurance is permanently part of your loan regardless of your equity position. Even if you have paid down 80% of the value, you will still care the MI.

Just for kicks, take the PMI you will pay every month and multiply it by 12 and then by 5. This is the total amount of the Lender's Insurance policy you will have paid over a typical 5 year holding period. Yuck!

Michael Seeker · Answer

My suggestion was for a conventional loan offered at 5% down which does not have PMI stuck to the loan (just the length of time for your LTV to be at or below 80%).  FHA loans are terrible unless you cannot qualify for a conventional loan.

Simon Campbell · Answer

Additionally, putting 20% down will give you the best interest rates which combined with not having to carry PMI can save you thousands of dollars annually. Some lenders, BTW, will allow you to waive the 6 month reserve requirement if you place the property with a licensed property manager for at least 12 months.

Darrell Hardy · Answer

Normally if you do not have 20% equity in the first property you will not be able to use the rents of the property to help count toward your DTI. So you will have to qualify for your second property being financially able to carry both mortgages plus have the six months reserves for each. Another poster may chime in but I believe this is how the Fannie Mae guidelines read.

Michael Seeker · Answer

@Jon Rylander - I'd suggest looking at a 5% down conventional loan with PMI and using the extra money you have to make improvements and add value.  After a year (or longer), you can have the lender order another appraisal and if you have at least 20% equity in the property they can remove the PMI at that time.

Jon Rylander · Answer

Say I go with the FHA and am happy with the returns how can I use my cash to pursue another property? Will a bank finance someone for a second mortgage? I'm sure it depends on DTI and any equity you could use towards the loan but does anyone know how this works?

Simon Campbell · Answer

@Darrell Hardy that is correct. All FHA loans that have less than a 20% equity position will carry PMI for the life of the loan. It does not matter how much equity you acquire over time or remodeling, you have to refinance to remove the PMI. In addition, their MI rate is higher than other lenders.

If you are looking for a low down payment, consider buying through HomePath or, if eliglble, through VA.

Darrell Hardy · Answer

If I'm not mistaken, after June 2013 FHA PMI will stay with with you for the life of an FHA loan.

1) When you go to refinance the chances of you getting a better conventional rate on a multi-family property will most likely not be possible.

2) In order to refi into a conventional loan you will need at least a 20% equity stake in a multi family residence.

There are a few other considerations but I think you get the gist of it, refying out of an FHA is not the easiest thing to do. With that said depending on your returns I would rather use FHA for my first property maybe even a 203k for renovations and keep my cash to pursue future properties. If you are comfortable with the returns you are seeing with FHA then use it if not put down your 20%

Peter Chan · Answer

You might be right - I actually have no personal experience with PMI - I have always avoided it like the plague.

Chris Cantrell · Answer

Hey Peter, unless I a wrong, FHA now requires a refinance to remove PMI.