FHA vs. Conventional

[Cameron McCown]

So many times, I hear investors propose an "FHA" option as the best option for financing a new multi-family they will house hack or new primary residence for themselves.

I can't say how wrong this is. It's true that the FHA will allow a 3.5% down payment. But it is also true that a Conventional loan can be obtained for just 5% down. And the difference? 1.75% of the loan amount in up-front mortgage insurance + approximately .05% in additional mortgage insurance per year.

So let's take an example. $110,000 purchase price with a $3,850 down with the FHA or a $5,500 down on Conventional. PMI with the FHA will be $75.18/month + $1,857.63 up front. PMI with Conventional will be $34.93/month to $104.92/month, depending on credit. We'll use the average of $70.09.

Over 1 year, you will pay $2,759.79 to acquire that loan through the FHA. On a Conventional loan, it will be $841.08. You've put $1,650 less down, and it's cost you $1,918.71 to do it, plus another $61.08/year after that.  

You have now lost -$268.71 on your minimum down purchase, just because you chose FHA vs Conventional.

And other thing- with most FHA loans, the mortgage insurance NEVER GOES AWAY. On a Conventional loan, it will go away once you owe 78% of the original appraised value.

So this is why I would never suggest a house hacker get into an FHA loan vs. a Conventional loan. It doesn't make sense. And it doesn't make cents...see what I did there? ;)

Take care.

[Wendy S.]

Originally posted by @Brian Adzadi:

@Cameron McCown

Hi Brian I believe Cameron is talking about FHA vs Conventional for a newbie like myself or someone looking to acquire a primary residence for a house hack. I used a conventional 3% down with PMI which I already now have the option of removing.

This choice was after I weighed the costs of a FHA, plus I didn't yet have the 2 yr working history but was able to find an amazing realtor and mortgage broker who made it possible.

I was able to purchase my 1st and only property Dec 2017, which I've been house hacking with my daughter while my 2 rented rooms covers PITI, all utilities, home owners insurance, internet, Adt full package monitoring, Netflix, etc, plus leaves me about $100 monthly.

So living free with of course Capex, Opex, vacancy and management as my responsibility when they arise. ($621 or 49.68% factored for this.. Cap-$150, Op-$150, Mgmt $140 & Vac-$140, Miscell-$41).

This decision has now put me on the path to keep this property as a full rental later this year while I obtain another low down payment primary residence conventional loan. Not to mention if I decided to sell yr end or the next 3 years with no capital gains tax, cha-ching. 

So, I have always wondered why the FHA 3. 5% with permanent PMI is usually touted as an introduction vs conventional with less than 3.5% downpayment and temporary PMI.

P. S. 

I'm still very new and continuously learning. Sorry for rambling on, but decided to add my journey so it might motivate a newbie reading, that it's possible 🙆.