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.