FHA (3.5%) vs Conventional (20%)

[Rickey Mayes]

Hey guys I am new to BP I just have a question about current interest rates right now and what is the best way to put a down payment on a rental? As interest rates keep increasing is it best to put a down payment of 20% instead of a FHA loan? Is it better to down a larger down payment so that the principal/interest payments are not so high or will the FHA loan do just as well. Is it a case by case house by house scenario?

I was questioning about this from a podcast “PASSIVE REAL ESTATE INVESTING: episode 440” talking about mortgage rates how they don’t matter because eventually long term success rate will cure all. 

[Jason Wray]

Rickey,

As a new investor you want to keep all of your money in savings for the "What if Factor" meaning anything that comes up unexpected. FHA would be a better option right now because rates are so close due to rate hike between FHA versus Conventional. You will save 16.5% of your money by sticking with FHA and even though FHA does have MIP (Monthly insurance) you can easily refinance in 6-12 months.

Just like the saying "Marry the home, & Date the Mortgage" so the rate is temporary and the loan program can be flipped on the refinance from FHA to conventional. When you refinance into a conventional loan out of an FHA loan at 80% your drop the FHA MIP so it reduces the monthly MIP mortgage payment. You can refinance out of an FHA loan even up to 95% if there is a "tangible benefit" meaning lower rate, lower payment.

The great thing about FHA and why its a better choice is if you can concentrate on a 2-4 Unit like a Duplex or tri-plex you can get into a Multifamily for only 3.5% down. Conventional is going to require 15-20% or more if its a 3-4 unit. FHA is 3.5% across the board so 2-4 unit still 3.5% and you can use the current rents of the other doors to qualify for a bigger loan amount.

In this market I have seen a lot of appraisals come in thousands of dollars short even as high as $40-$50K short over the last 4 months.  That is a good sign to put less down in a up/down market until things even out with rates and market analysis.