Conventional loan & cashflow or FHA & break even?

Question

Hi all,

I am under contract for my first property (du-plex with one unit rented out) and had a question on the financing. I have good credit (730+) and solid income.

I am currently lined up for a conventional loan with ~15% down, 6.5% rate, and low closing costs but this would use up most of my liquid cash (minus emergency fund). Based on my calculations, this would lead to cashflows around $700 per month.

I am now looking more into FHA loans and wondering if that would be a better idea since I can only use this on my first property. This way I could save lots of the liquid cash I have in case I want to purchase another property. However, after doing the math on the 3% down payment, I would no longer cash flow. I have income income to off-set some negative months.

What do you all think is a better idea?

Jamie Jones · Answer

Hi @Steven Catudal, you don't have to be a first-time home buyer to get an FHA loan, so nothing is stopping you from using a conventional now and then FHA on your next one. The main caveat with that is you may be limited on how much rental income you can use from your departing primary residence (the house you are buying now) when you go to buy the next one, unless it is at least 100 miles away.

Now to your main question, you could always look at still going FHA but putting more than the 3.5% minimum down. At a 5% down payment, your MIP is reduced. So maybe you could look at doing somewhere around 5-10% down and seeing how the numbers pencil out? This could be a way to hold on to a little more liquidity while still cash flowing. Also, you can now purchase 2-4 units on a conventional loan with as little as 5% down, although sometimes the PMI on that can be quite a bit higher compared to FHA.

Wayne Brooks · Answer

@Steven Catudal You can now do 5%-10% down on a conventional loan for a duplex now. Not sure about any restrictions. The conventional is better for the ling term as you can drop PMI at some point.

The MIP on fha is for the life of the loan. FHA loans are not just for your first house. If you use conventional now you can still use fha any time in the future as ling as you will owner occupy.