FHA vs. Coventional

[Elijah Householder]

Hello all,

Pretty new to the forum still so apologies if this is in the wrong spot. But I have a question about conventional mortgages vs FHA.

I am looking to “househack” within the next 1-2 years. I am a recent grad and saving enough to put around 10% on 2-3 unit property with a PP of around $400k-$600k (In Socal so dont have many cheaper options).

So my question is, is there any reason I should choose an FHA over conventional? I know FHA offers a 3.5% but aren't first time home buyers able to do a 3% with conventional? Plus PMI drops off unlike MIP for an FHA.

Any advice would be greatly appreciated.

Thank you!

[David M.]

@Elijah Householder

Talk to a lender. If you need a referral direct message me.

It should boil down to your credit score. With a better score, pmi will be cheaper with a conventional loan since the private market will take a risk on you. If your score is poor, the private market will have high premiums so the gov't backed FHA loan will wind up being cheaper.

Of course, if you can get a conventional I’d go that way.. but it’s going to depend on your personal circumstances..

[Stephanie P.]

@Elijah Householder

FHA is the most "units friendly" way to purchase a property. With 3.5% down, it has the lowest barrier to entry. There are caveats though. As you mentioned, MI doesn't fall off with FHA and there's financed upfront MI as well, so with the lower barrier to entry comes long term cost not to mention the self sustainability rule for properties with 3-4 units.

If you can come up with the additional down payment (5% vs 3.5%), Freddie Mac's Home Possible is the superior loan product to use for 3-4 unit properties.

To answer your question about 3% vs 3.5%, 3% is for single family homes, not units.  Having a multi family property is the ultimate way to house hack, but having roommates, if you qualify without their income works as well.

Hope that helps

Stephanie

[Michael Ablan]

@Elijah Householder - FHA is a great loan for people who can't qualify for the 3% conventional products. If you can qualify for the conventional product then you should absolutely do that

[David M.]

@Elijah Householder

You can google it... I thought the min down payment requirement increases as you have more units when dealing with multi families..

Good luck

[Steve Vaughan]

As a seller, I don't allow or give serious consideration to offers with FHA financing, especially with older properties.

Regular appraisals right now in my area are taking 6--8 weeks. I doubt FHA are faster to happen, but at least they will have more subject-to's and seller corrects.

I'd save the extra 1.5% or so for the dp and go conventional if possible👍

[Eric Johnson]

@Steve Vaughan yes, but that shouldn't be a factor in his decision making because he isn't even in the position to purchase right now. 

FHA 203k is the best to acquire a building that meets value add criteria. The 3% conventional products you are referring to are called Fannie Mae Home Ready and Freddie Mac Home Possible. Any agency approved lender will be able to give you specific information to qualification as it regards to your scenario. Those programs do not include any repair funds, like 203k.

If your goal is forced equity through renovations coupled w/ low DP, then FHA 203k has been proven the best way to start if you're in need of primary residency.

[David M.]

@Eric Johnson

Yeah, but he didn't say anything about doing renos and needing a 203k option..

[Eric Johnson]

@David M. If he hasn't done a deal, why not present options? He is not locked into a box and will probably consider all options and then make a choice, not the reverse... appreciate the feedback tho 

[Steve Vaughan]

Originally posted by @David M.:

@Eric Johnson

Yeah, but he didn't say anything about doing renos and needing a 203k option..

Seller preference for almost any type of loan except PITA FHA in a tight market isn't a factor apparently. Because the OP isn't there yet.

Learn something new everyday I guess😎

[Eric Johnson]

@Steve Vaughan Yeah, except that's always viewed as an issue and not really a considerable factor in doing a deal because of a sellers preference. The main goal is to get an accepted offer on a property that works, if he has to submit 30 offers to get a deal, then that's what happens.

Also, many brokers/agents I know chastise VA loan for the same exact reasoning you are mentioning. However, this has little to do with the fact that it's a specific loan product rather than dealing with competent parties. If FHA standard 203k or streamlined 203k is his best option to yield him an ROI, then that's what it is...

By your logic, you are claiming that no one should use FHA financing because it'a a tight market, even though your notions ring true in every market cycle, for reasons mentioned above (see VA example). So, yes I am saying he shouldn't really GAS what particular sellers preference is if it's a first acquisition.

Just make sure it's a good deal and submit the offer... Don't know why this is so complicated.

[Steve Vaughan]

Originally posted by @Eric Johnson:

@Steve Vaughan Yeah, except that's always viewed as an issue and not really a considerable factor in doing a deal because of a sellers preference. The main goal is to get an accepted offer on a property that works, if he has to submit 30 offers to get a deal, then that's what happens.

Also, many brokers/agents I know chastise VA loan for the same exact reasoning you are mentioning. However, this has little to do with the fact that it's a specific loan product rather than dealing with competent parties. If FHA standard 203k or streamlined 203k is his best option to yield him an ROI, then that's what it is...

By your logic, you are claiming that no one should use FHA financing because it'a a tight market, even though your notions ring true in every market cycle, for reasons mentioned above (see VA example). So, yes I am saying he shouldn't really GAS what particular sellers preference is if it's a first acquisition.

Just make sure it's a good deal and submit the offer... Don't know why this is so complicated.

Eric, all I suggested was to go conventional if he can.

Nothing was said by him about 203k rehab loan or VA. If one has the extra couple % to put down on a normal transaction, conventional will have the fewest extra hurdles to jump over is all.

[Stephanie P.]

There's a natural flow of ways to finance a purchase. Cash then conventional then VA if you can then FHA as a last resort. FHA, since 2010, has been the new subprime. It's no secret that the borrowers are harder to qualify and the appraisers are harder on the property. It's also no secret if you can put just 1.5% more down, your loan is a lot less expensive. The OP says he is saving to put 10% down which makes FHA a moot point.

[Johnny Lynum]

@Elijah Householder Based on your ability to make a down-payment of more than 3.5%, I would say get your credit score up as high as possible and go the conventional loan route!

[Michael K Gallagher]

I'll beat the same dead horse that is....if you can make the conventional work do it, its the better option, but if you can't there is nothing wrong at all with FHA, and it's a great tool to get into a House hack. Thats what we did. You can always refi later back to conventional.