Profile picture for jjtvalpo

FHA vs Conventional

My fiance are shopping around for homes right now in San Diego.  Aside from the sticker shock (we moved here from the Midwest), we're really enjoying it, but the financing options are making my head spin.  Perhaps you can help.

Our "mortgage planner" (to whom we have no obligation) thinks we should go with an FHA loan because of the low required down payment.  I'm skeptical because of the nasty UFMIP numbers and the monthly MIP numbers.  I don't see why we would do that when we can afford at least 10% down (currently in cash) and we have good credit.  We could even afford 20% down, but that would require some liquidation of lots of my stocks/mutual funds/ETFs.  Both of us have good FICO scores (770s and 730s). The mortgage planner says that I should keep my investments so we can have the low down payment and keep the option to "streamline" later on.

I see three main avenues here, and would like to know which makes most sense:
1.  Go with the FHA Loan
2.  Sell enough assets to get a 20% down payment together and avoid PMI.
3.  Doing some sort of "piggyback" loan (like an 80/10/10).

A few other considerations:
-My fiance is an MD, which qualifies us for a "Physicians Loan."  Those offer some preferential treatment.
-We're leaning toward doing a 5/1 ARM, since we will probably want to upgrade when my fiance finishes residency (meaning big pay bump).

  • September 25 2009 - North Park
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Answers (8)

Go with the FHA to avoid liquidating your assets, FHA PMI is more affordable than Conventional PMI that is required with less than 20% down. Have your planner provide scenarios for the conventional and FHA and feel free to shop around. 730 fico is the score that will be used, and FHA requires 3 years tax returns. I am not sure what your planner has already explained to you, thats why its always good to get another opinion, which you are doing here.

You are right there are advantages putting 20% down, but then there are disadvantages when you are liquidating your assets and retirement. Since once you put that 20% down into the house the only way you are going to get it back is if you sell the home or refinance and cash out, but if the value of the home doesn't go up your back to paying the PMI and not getting the full 20% back.

Look at the 5/1 ARM with 10% down, since your wife will be done with the residency and income will grow, you sell the home and upgrade. Again compare the conventional PMI with the FHA. Of course our goal is to get you into a home with as little investment so that in the future you can make the move to upgrade.

I hope this helped and wish you the best of luck.

  • September 25 2009
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Profile picture for senmmail
Most of the lenders advice to go for Conventional if one has 10% down. Is 5/1 ARM a good option considering lower rates?
  • September 25 2009
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If you prefer the 5/1 ARM, I think the 10% down Conventional works out much better.  You avoid the 1.75% UFMIP fee, and the monthly MI is only slightly lower on FHA than monthly PMI on a Conventional.

Also, interest rate is MUCH better on Conventional 5/1 vs. FHA 5/1. 

I don't agree with you "planner" on FHA being better because of possible streamline, especially since you have stated your plans to upgrade.  Rates are already very low right now, I do not think you are going to see a future streamline opportunity if you get a current market FHA rate today.

FHA can often be more profitable to the originator than Conforming loan, so I certainly hope this is not the incentive of your planner.

If you decide on 30 fixed instead, then the comparison is much closer in picking between the two loan types.  Lastly the 80/10/10 is not really an option.  I don't know of any traditional programs in San Diego that provide the 10% secondary lien at this time.  There are some similar programs for first time buyers, but they are subject to income limitations.

  • September 25 2009
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Profile picture for Bentley Advisors
FHA UFMIP essentially subsidizes your monthly MI for the first 5 yrs allowing for a reduced monthly.  I believe the goal of this was to provide monthly pymt relief for the borrower in the beginning yrs of the mortgage. Quite frankly, when you net out the MI figures for the first 5 yrs between Conventional vs FHA, there won't be a huge difference in MI expense. So, then the question becomes whether you wish to put a larger down pymt or smaller.  Also, you might wish to avoid liquidating your stock portfolio unless it's flea ridden.  As the economy recovers in coming years, companies will once again prosper.

As for loan program, if you can qualify, you might consider locking in a longer-term fixed rate today as we're likely near the lows for years to come.  Rates will rise and you won't likely have the option to refi out of your 5/1 ARM at rates similar to today's.  If you do, you'll still be paying another set of closing costs.  Also, I'm not aware of anyone offering an 80/10/10 these daze.  However, you may be able to close w/ 20% down and then, after the fact, find a local credit union/bank that may be willing to offer a HELOC for 10% effectively allowing you to pull it back out.

Good luck.
  • September 25 2009
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Profile picture for Bentley Advisors
Addendum...so I missed the fact that you wish to upgrade in a few yrs. Even so, you might consider beginning your investment portfolio of rental homes by keeping it as a rental if the cashflow figures make sense.  If so, I'd still advise the 30yr FRM.  If you have no intentions of keeping it as a rental post-upgrade, go for a 5/1 ARM.
  • September 25 2009
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Profile picture for Justin Kennedy
check into 95% conventional loans and MI requirements
check with you tax acccount about the abilty to write off UFMIP and MIP
if at all possiable, stay with a fixed rate.
check the arms Caps and Index, make sure you are well aware of the adjustments and how they work. if you are unable to sell quickly in the future.
  • September 25 2009
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Profile picture for NeedinFHA
Actually FHA requires 2 years tax returns, thats all I gave them and they didn't say anything.
  • September 30 2009
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I totally agree with your PLANNER. FHA allows you the opportunity to purchase with a low down payment and keeping your portfolio intact. Furthermore, the goal is to upgrade but the way things are going residency can be 6 or 7 years causing the delay to upgrade and your rate will almost certainly be higher than what you would be looking at today. Safest bet, buy w/ FHA today. Sell and buy 20% conv 5/6/7 years from today.
  • October 02 2009
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