FHA Loan Or Conventional Bank Loan?

Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes

Would it be best for my first deal to be though a FHA Loan Or with a Conventional Bank Loan? I know with a FHA Loan I would have to live in the property for a certain amount of time, plus the Down payment is lower 3.5% I believe. I don't know the full details with FHA loans. Any Suggestions?

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Ryan Dossey

Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes

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PMI does NOT drop off on FHA anymore. It's on for the life of the loan unless you refinance out of it. Just a heads up. Mine is like 75 a month extra.

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Kelly N.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
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If you can get an FHA loan, why not do that on a multi unit (2-4 apartments) and live in one unit while you rent the others?
We went the conventional route, and the downpayment is 20% (25% for 2-4 units). The interest rate tends to be about .5% higher than a conventional loan but you aren't paying PMI and you don't have to live there.
So it depends on how much cash you have to invest and what your short and long term goals are.
Kelly
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Hattie Dizmond
Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
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@Account Closed
My first suggestion is you spend 20 minutes or so on the FHA site. A simple Google search will answer your question, including helping you understand that 3.5% isn't available to everyone. However, it is one of the options available on an FHA insured loan.
Yes. There is an occupancy requirement. You have to occupy the property within 60-days of close, and you have to be planning to use it as your permanent residence for the majority of the following 12-months. There are out clauses on that, but that's the basic idea. If you buy a multi-unit property (2 - 4), you only have to occupy 1 of the units.
FHA also has PITI (mortgage insurance) requirements for anything with less than 20% down.
Conventional loans offer you the most flexibility, but they almost always come with at least a 20% down requirement.
If you are a veteran, VA loans may be a better alternative. I'm not sure about the residency requirements there.
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Kelly - Thanks For the Insight. I never thought about the 2-4 while living in one idea. That's interesting. Cash Wise I have alittle more ways to go before I can invest fully into a 2-4 unit. Just a Few grand saved up.
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Aldo Ricaurte
Tampa Bay, FL · Member since 2015 · 15 posts · 1 vote
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You should stay away from FHA loans if you have 20% down for a conventional mortgage so you don't have to pay PMI. It will also keep your monthly payment lower.
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Eddy Dumire
Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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It depends on your needs. If you need a low down payment and have credit issues, then FHA will offer you more opportunities. Their underwriting guidelines are a little more forgiving. They can do loans with very low credit scores that cannot be done with conventional mortgages. It all comes at a cost though in terms of mortgage insurance that cannot be cancelled for the life of the loan. FHA loans used to be consistently more expensive rates (by about 100 basis points or so) but they are about 50 bp cheaper with the recent MBS dynamic. There is an additional funding fee that has to be paid at closing too.
My suggestion would be to use conventional financing when possible and use FHA only if necessary.
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Hattie DizmondThanks For The Knowledge. Wow that truly helped me. I will spend some time on the FHA Website. How would I occupy the property within 60 Days of closing?
@Aldo Ricaurte I don't have 20% down for a conventional Mortagage at this time. Would you suggest I wait and save for one? And also what is PMI?
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Troy Sheets
Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
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Originally posted by @Account Closed:

Would it be best for my first deal to be though a FHA Loan Or with a Conventional Bank Loan? I know with a FHA Loan I would have to live in the property for a certain amount of time, plus the Down payment is lower 3.5% I believe. I don't know the full details with FHA loans. Any Suggestions?
There was just a great #askbppodcast on this exact topic.
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Ryan Dossey
Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
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PMI does NOT drop off on FHA anymore. It's on for the life of the loan unless you refinance out of it. Just a heads up. Mine is like 75 a month extra.
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Ryan Dossey
Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
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PMI is mortgage insurance. So if you can't pay your loan your note holder isn't screwed over.
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Eddy Dumire Thanks Man. Appreciate the feedback. Would you say hold off and save a few more bucks to go the conventional Route for a Single family Home? Rather then getting a FHA for a 2-4 apartment unit and I live in one of those units?
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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Originally posted by @Ryan Dossey:

PMI is mortgage insurance. So if you can't pay your loan your note holder isn't screwed over.
Hey Ryan Thanks For that insight.
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Eddy Dumire
Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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@Account Closed suggests or something else? Does the property your looking at need significant renovation (203k loan)?
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Ryan Dossey
Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
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@Account Closed Not a problem! That's what I'm here for. Also closing costs can be a little high on FHA as well. It's not a bad way to do it. Honestly if you are going the 2-4 unit route I wouldn't let it scare you off. The faster you can "get started" the better in my opinion.
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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@Account Closed
I actually just had clients comparing the 3.5% down FHA vs a 5% down conventional. This assumes the conventional loan will be payed down to a 80% LTV after 10 years so the insurance drops the last 20 years of the loan.
Here is how it played out:
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Eddy Dumire
Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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@Brie Schmidt
Love the example.
Do you have the monthly MI cost for your example handy? I'd like to see how that compares to upfront or lender paid PMI.
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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@Eddy Dumire
The lender said with FHA the mortgage insurance would be $277 and with conventional it would be $170 but at a higher interest rate
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Josiah W.
Lender · Miami, FL · Member since 2015 · 134 posts · 5 votes
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Originally posted by @Account Closed:

Would it be best for my first deal to be though a FHA Loan Or with a Conventional Bank Loan? I know with a FHA Loan I would have to live in the property for a certain amount of time, plus the Down payment is lower 3.5% I believe. I don't know the full details with FHA loans. Any Suggestions?
depends if your going to live in it
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Eddy Dumire
Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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According to MGIC's rate card (a PMI provider) a single premium PMI payment is 2.48 pts for a 95% LTV 30% coverage policy assuming the borrower has a credit score from 720 to 739. That works out to an upfront payment at closing of $9400. That's quite a chunk of change, but 10 years of $170 monthly PMI payments is $20,400.
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Eddy Dumire
Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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Actually United Guaranty (another PMI provider) has already done the math for this scenario:
https://www.ugcorp.com/docs/mi-vs-fha/A430B-FHA_PRICING_Borrower_95LTV.pdf
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Brie Schmidt Great info and great chart. That has helped me out. Thanks for that chart. Didn't know I could do a 5% down on a conventional loan. Is that based on your Credit?
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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@Account Closed
Yes, you need a higher score to qualify. Usually this is only for single unit properties but it depends on your census tract. The deal my clients are doing is for a 2 unit and they allowed 5% down
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Brie Schmidt Ok Awesome. i didn't know that. Sounds like i should get my credit score to that correct level. %5 conventional sounds like a great option. Thanks again Brie. You have been a great help. Especially with that Chart For an Example.
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Charles Brumfiel
Homeowner · Aurora, CO · Member since 2015 · 11 posts · 4 votes
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@Account Closed
Ask your lender if you qualify for a Conventional loan. I was pre-qualified and ready to go with a FHA loan at 3.5% down but I asked my lender if there was any other options because I didn't like all of the upfront FHA fees. My lender said there was a conventional loan at 3% down with a slightly higher interest rate, but you need a certain credit score to qualify. She ran my credit and I qualified. I paid a lower down payment, had no upfront FHA fees, will only have PMI until 78%LTV, and my interest rate is only 0.25% higher than FHA. I saved many thousands of dollars upfront and throughout just by asking about other options.
If you have decent credit see if you qualify for a low money down conventional loan.
Best of luck to you!
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OP
Investor · Baltimore, MD · Member since 2015 · 123 posts · 38 votes
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@Charles Brumfiel Thanks For that info. Do you know by chance what was the difference in your down payments from the FHA and your Conventional Loan?
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Charles Brumfiel
Homeowner · Aurora, CO · Member since 2015 · 11 posts · 4 votes
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@Account Closed
Based on my purchase price of $90,700
Conventional 3% = $2,721
FHA 3.5% = $3,174.50
So in the down payment I saved $453.50
The real benefit was that I saved several thousands in fees and PMI.
I can lookup how much I saved in fees when I get home and I'll let you know.
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