3.5% Down FHA vs 5% Down on conventional loan?

7 Replies

Hello BPers,

I am currently considering a deal which I paln to finance it though a bank. The property is built in the early 1990's and is in a failry good shape , no structural damage but needs some cosmetic reparirs and updates. I have been advised by my Agent to go with a 5 % down convntional loan Vs a 3.5% down FHA loan.

My Agent cites the PMI (Private Mortgage Insurance) charges beign gone after I accumlate 20% equity on the property on a 5% down conventional loan Vs PMI (Private Mortgage Insurance) beign charged for the life if the loan for an FHA (unsless I refinance it later after equity buildup) as a reason not to go for a FHA loan.

Since I am planning to buy an older home I think FHA would be more stringent when it comes to inspections and appraisal and I have a much reliable appraisal and inspection reports when compared to a regular inspection where thigns might be overlooked upon.

Is this a genuine concern? Is my Agent looking after my best interests? I am curious to know. What are your thoughts? Appricate all your comments.

Conventional will probably be easier and possibly even cheaper over the long term if you have a 5% down conventional available to you that is valuable. FHA will always be there for your primary residence for the foreseeable future. Conventional with only 5% down is quite rare. If you were to ever move out and rent the property conventional would also be to your benefit.

Vamshi, depending on your area you may be able to get a conventional loan with even less money down. For my first property (that I am still currently house hacking) I got a 3.5% conventional loan. There is PMI on the property until a certain equity threshold is met (I forget what the exact number is on the loan though).

The market is ramping up quite quickly, especially with rising interest rates. So this may not be as easy to attain from lenders now.

@Vamshi Ananth

Conventional is by far easier to obtain and requires far less paperwork from the lender.

I had to write all sorts of explanation letters and jump through ridiculous hoops for my FHA loan. By comparison the conventional mortgages I have were quite simple.

Not only that but in a competitive market (Omaha is pretty competitive right now) conventional mortgages are beating out FHA during the offer process.

The only reason to use an FHA loan is if you have bad credit and can not qualify for a conventional loan. (Assuming single unit property)

@Vasmshi Ananth Your agent is right for PMI reason. Regarding your concern about appraisal, your inspector will do the inspection on your home in good faith which will give you all the information about the property condition. They care about their client not its FHA or Conventional loan. You can get comparison on your loan for both products and see which product will save you money.

Check with your lender as you may be required to have a 20% down due this begin an investment property.  I thought fha requires you to live in the property 1 year before it can become an investment property.