First Time Multi Buyers- DON'T USE FHA
I may seem like a hypocrite here since I bought my first 3 Family with an FHA loan and 3.5% down back in 1999.
But there are more options now.
Mass Housing has some products
Local Credit Unions and Local Banks have portfolio loans with low down payments.
Why you should go FHA
- You have BAD CREDIT
- You only have 3.5 % to put down, and hope someone else is paying your closing costs into the loan
- There are often higher loan limits then with conventional programs
Why you should get a conventional low down payment loan
- You have good credit 680 and above
- you have 5%
- Sellers like conventional loans better, they do not require the FHA self sufficiency test, or the FHA appraisal/inspection- sometimes if there is chipped or peeling paint, they will simply throw your offer in the trash
Major differences that side with the conventional loan.
- FHA has front loaded Private Mortgage Insurance (PMI) so you pay more up front and less if you hold the loan to term
- With FHA if your house appreciates (you get to 20% equity) you have to refinance to get rid of PMI, with conventional you can get an appraisal and stop paying PMI
- NO FHA appraisal/inspection
Let's do an example:
You are buying a $400k house and assume 5% appreciation a year. In 5 years that house will be worth $510,512.
Buy the house with FHA. 3.5% down $14k and another $15k in closing costs so $29k out of pocket loan for $386k. In 5 years you are still making the same payment.
Now you buy the same $400k house with 5% down conventional loan, so $20k + $15k in closing costs for $35k out of pocket. Basically 21% more down payment. Now 5 years from now when the house is worth $510k you call the bank pay $700 for an appraisal and your monthly PMI goes away.
Let's say you took out your loan in 2021 at 4% rate. If you did the FHA loan, you can keep your 4% rate but you have to pay PMI until rates come back down to 4% or even without PMI your cost might be more. If you did the Conventional loan, in 2026 you simply call the lender, appraise your house and no more PMI and you get to keep your 4% rate.
Make sure you check with lenders who do both FHA and low down payment conventional loans and have them show you the cost benefit analysis of both options so you can make an educated decision.