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Thanks for starting this post, Moana! Very good info so far. I have some confusion about FHA verus conventional loans. I will give some info about my situation: - 60K/yr gross income, not married, zero debt, 25K in savings - ~685 FICO score, seems to be between "good" and "average" - Looking at houses in the $100k-120k range. Pre-approved for 150k FHA loan. - Live in Austin, TX, where the housing market has mostly been stable. I had originally planned on getting a conventional loan and putting down 20%. When I applied for pre-approval, my lender told me that, due to my credit score, I'd get the prime rate for an FHA loan, but would get a higher rate on a conventional loan (maybe 1% higher?) due to stricter credit rating standards. I could come up with a 20% downpayment on a 100-120k, but it would almost wipe out my savings, which I don't think I want to do. The FHA loan requires only a minimum of 3% down, but I would be looking at paying more like 10-15% down. This would leave some money for emergencies and the inevitable repairs, appliance purchases, etc, that come with a new home. The main disadvantage to an FHA loan seems to be the mortgage insurance. My understanding is that, with an FHA loan, an insurance premium of 1.5% of the loan amount is calculated up front and rolled into the loan. This is on top of the roughly 0.5% annual insurance cost. In my situation, for a 100k loan, this premium adds $1500 to the total loan amount. But I was also told that the monthly mortgage insurance payment on an FHA loan is lower than PMI on a conventional loan. I am not 100% sure about this part, is this true? Also, I have read in some places that an FHA loan requires you to pay the insurance for the life of the loan, but other sources say that you discontinue those payments after you reach 22% equity (as opposed to 20% for a conventional loan). Which of these is correct? It seems like, if I get a significantly lower interest rate with an FHA loan, the $1500 insurance premium will potentially be cancelled out by the difference in interest I will pay over the first few years of the loan. So my question is: Is there any real advantage for me to struggle to come up with 20% for a conventional loan, if I can get a lower rate with a lower downpayment on a FHA loan? If I can afford 15% down, is it worthwhile to wait until I can afford 20% down and get a conventional loan instead? There does seem to be one big advantage to the FHA loan, though: It is assumable. This means that if I sell the house in 3 years, I will be able to sell it to another FHA-qualified buyer and allow them to assume the loan with my low 2009 interest rate. In addition, they don't have to pay all the initial costs of obtaining the loan. This seems like it could be a big selling point, especially if rates go up. I am also curious to hear the thoughts of experienced people regarding the $8000 tax credit. Everyone seems to think that sellers/owners are marking up the price of every home by $8000 to account for this credit. Is this really true? Is there any solid home pricing data to back this up? Based on casual observation, I did not notice an $8k spike in home prices here at the beginning of the year. Does anyone have any hard data or personal experience to speak to this point? thanks again for doing this, OP - sorry about the wall of text.
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May 6, 2009 20:59
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FidgetyRat posted:1) That up front mortgage insurance fee of 1.5% house cost is totally down-the-drain money. Thank you for the advice. But I think the info about the FHA insurance is off. From what I am reading (including on fha.com), the monthly FHA insurance payments will be canceled after 5 years of payments and 78% LTV, which I would have after 5 years. This is not great, but not as bad as 30 years of mortgage insurance payments. I did some really basic math and on a 100k loan, those 5 years of monthly payments would add up to ~$3000 plus the $1500 up front fee, so $4500 after 5 years. If the difference in interest rates between a FHA and conventional loan (for me, based on my credit score) is 1%, after 5 years the difference in interest payments would be about $5000 - so it looks like a wash. If the difference in interest rate is less, then it looks like a conventional loan may be better - based on these numbers and I'm probably forgetting something (like the PMI payments on a conventional mortgage). If I put down 10-15% on a 100k loan, I can certainly pay down 20% equity in well under 5 years. So... If the numbers are even, do you think any of the other advantages of the FHA mortgage make it worthwhile? I guess I just need to apply for a conventional loan and run the numbers to figure out the actual net difference in interest rates vs. penalties with each mortgage. Perhaps I should just wait until I can improve my credit score (I just have slim credit history, no debt), but I have to admit that I've caught the house-buying bug and want to find something in the next 6 months or so. Anyway, thank you for the advice!
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May 7, 2009 04:20
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FidgetyRat posted:Either way you look at it, remember, your first 5-7 years or so of payments on the amortized schedule will pretty much be interest only, so unless you throw several thousand extra dollars at the principal each year, it will take longer to get rid of any Mortgage Insurances you may carry. This was my plan - Pay an extra $100-200 every month towards the principal (I am already doing this in saving for the downpayment) and an occasional larger payment, maybe once a year. Hell, if I put half of the $8k tax credit toward the principal that would pretty much do it. I don't have any other higher-interest debt to worry about at this point.
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May 7, 2009 16:35
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emocrat posted:Mine is a 2 year minimum, once past that we can apply to have it removed. Mine also removes itself after 10 years, with a rate adjustment (lowering the amount of PMI) somewhere in the middle, don't remember the exact time. I believe that, with conventional financing, they are legally required to stop charging you PMI after you reach 22 percent equity - based on a state-certified appraisal. You can send them an appeal when you reach 20%. With FHA financing you do have to pay it for x years, along with an up-front payment. I wasn't aware that typical PMI policies had a minimum length - I thought it was just until 20-22% equity. If thats true, it's good to know. Also, the PMI rates should change at 5, 10, and 15% downpayment. If you pay 10% down, you should get a better PMI rate than if you only put down 5%. I'm not sure if this changes as you pay the house off, or only on the downpayment.
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Mar 4, 2010 17:03
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