FHA or New 5% Conventional Loan

[Ryan Smith]

Good Afternoon Bigger Pockets Member, 

I am looking to invest in my first rental property when I graduate at the end of December. When looking at possible financing options for the property, every book recommends FHA. However, I just became aware that on November 18th a new 5% down conventional loan will become available. I am having a tough time seeing the pros and cons of either method outside of the basics. I would assume the 5% conventional would be much better because it does not have FHA insurance payments every month hurting the cash flow. I have enough savings to cover either but would love to hear other opinions on what you think is the best plan moving forward. Thanks and have a great one!

[Mason Weiss]

I would advocate going with a conventional loan so you don't have PMI for the life of your loan. You should talk through your options with an investment friendly lender in your state so you can discuss specifics for your situation.

[Ryan Smith]

Thanks! Appreciate it. 

[James Tiegs]

Hey Ryan, 

One thing to consider is that conventional loans generally have slightly looser requirements when it comes to livability of the property upon purchase. So if you were looking for a value add property you might be more restricted on what you can buy with that loan.

Also, you will still pay PMI on the conventional loan but it will be lower than FHA depending on your credit.

Tim Swierczek is someone local that is very experienced helping investors. You should reach out to him with more questions!

[Brittany Minocchi]

You'll still have monthly mortgage insurance to pay whether you go with FHA or conventional with a <20% down payment. However, big benefit of conventional over FHA is that once you reach 20% equity, you can request for the PMI to be removed. It will automatically fall off at 22% equity. With FHA, you're stuck with it for the life of the loan unless you put down 10%, and even then you'll have it for at least 11 years.

Conventional is also a bit more flexible when it comes to the condition of the property, and from my experience, sellers prefer a conventional offer over an FHA offer. FHA will usually have a better interest rate and allows for a lower credit score. Which one is best depends on your situation. Good luck!

[Joseph Coleman]

@masonweiss

This is an interesting new product. I would work with a lender to have them run both scenarios for you so that you can compare and make the best decision for you. Most notably, I think the biggest difference will be the APR. FHA is generally a little more expensive but it depends on your situation.

BiggerPockets has a lender finder tool that will help with finding an investor friendly lender. Link to Lender Finder. 

[Peter Mckernan]

Quote from @Ryan Smith:

Good Afternoon Bigger Pockets Member, 

I am looking to invest in my first rental property when I graduate at the end of December. When looking at possible financing options for the property, every book recommends FHA. However, I just became aware that on November 18th a new 5% down conventional loan will become available. I am having a tough time seeing the pros and cons of either method outside of the basics. I would assume the 5% conventional would be much better because it does not have FHA insurance payments every month hurting the cash flow. I have enough savings to cover either but would love to hear other opinions on what you think is the best plan moving forward. Thanks and have a great one!

Lot to be thrown in here, the other thing is that DTI is looser on the FHA verse the Conventional loan side.
Also, the 203K loan is an option for the FHA side to give you funds to fix up the property (one thing is on this higher rate, and debt goes on the loan.. also, you can push the payment on it out for that property 6 months while you fix it up). Just some added info for you when trying to figure out what to go with! 

[Jessie Dillon]

hi! so you will still be paying PMI on the 5% down conventional. anytime you put down <20% you're usually paying PMI. one big factor is that with an fha loan, there's an fha inspection type walk-through where someone from the mortgage company will go make sure the property is 'safe' for a new homeowner; this is a deterrent for some sellers because they're worried they'll have to pay to repair stupid little stuff before closing. this doesn't happen with conventional, so an offer with a conventional loan can be more appealing. in a competitive market that does make a difference.

[Tristan O'Reilly]

Hey Ryan, Not sure if you have talked with a lender in the area but, I have a lender here in Minneapolis who is very well-versed in investing and financing in the area and I'm sure he would be happy to sit down and go over the pros and cons of each with you. I see you are also from the Twin Cities and I know there is a lot of good downpayment assistance you might be able to take advantage of. Please let me know if you'd be interested, hope all is well!