First Post, Evaluate Mortgage Pre-Approval options

[Drob8]

Hello everyone!

First post on here, but I've been lurking for a couple of months now.  I live in Miami, Fl. I'm 32 and make about 75k per year at my job  I'm trying to decide if it's worth it to purchase a house right now.  I recently got pre-approved for a mortgage loan
and would like some input as to what would you consider would be my best option. I have 20k saved for the whole process and these are the two scenarios that the lender approved me for:

Credit Score : 760
Student Loan: 25k
Credit card debt total : 1.2k
Car Loan: None

CONVENTIONAL

https://imgur.com/OKN9KK4


FHA

https://imgur.com/52tAbfK

Thanks in advance for all comments and help

[lizzzi]

I'm not a financial whiz, and I'm sure better brains will be along, but I would continue to rent an apartment (assuming that's what you're doing now) and pay off your debts. I'd save more money for a down payment, and also try to find a cheaper house. Looking at your figures, it looks like you're not going to own your house--the house (i.e. the lender) is going to own you. There's the old rule of thumb that your house should cost no more than two and a-half times your income: So your income is $75,000...your house should be no more than $187,500. I've bought and sold six houses in my lifetime, and invariably found that I "qualified" for around twice the amount I actually felt would be affordable to spend for a house.

[Drob8]

Hi there, Thank you for your input Lizzi. Great rule of thumb, I was not looking at it in that perspective.

There's the old rule of thumb that your house should cost no more than two and a-half times your income

 

I also forgot to mention that someone else will be contributing($800) to the monthly rent for this property so that would alleviate some of the burden.

[robartsd]

Remember that the property tax, homeowners insurance, and HOA are all being estimated here and can change over time (but should be the same for either loan estimate).

While the conventional has a higher rate, it looks like it also has a lower mortgage insurance option (the only part of the taxes and maintenance line that should differ between the estimates) leading to the ~$50 lower total monthly payment for the conventional loan in spite of the slightly lower down payment. I believe FHA mortgage insurance is always for the life of the loan, but conventional loan mortgage insurance can often be cancelled after the loan balance falls bellow 78% of the purchase price (you might want to check the details on this). I can't see any reason to choose this FHA loan over this conventional loan; but there could be other closing costs differences that are not shown on these estimates.

[frugaliknowit]

I'm not a financial whiz, and I'm sure better brains will be along, but I would continue to rent an apartment (assuming that's what you're doing now) and pay off your debts. I'd save more money for a down payment, and also try to find a cheaper house. Looking at your figures, it looks like you're not going to own your house--the house (i.e. the lender) is going to own you. There's the old rule of thumb that your house should cost no more than two and a-half times your income: So your income is $75,000...your house should be no more than $187,500. I've bought and sold six houses in my lifetime, and invariably found that I "qualified" for around twice the amount I actually felt would be affordable to spend for a house.

+1

You don't say how much cash you have available...

[405programmer]

In general conventional loans are a better deal than FHA because of the point robartsd pointed out that you can eventually get out of PMI on a conventional loan but can only refinance out of PMI on an FHA loan. That said I also agree that you're trying to buy too much house with a 75K salary. Hell I make 80K and I bought a house for 123K and thought I was overspending.

Get them to quote you the difference in mortgage insurance outside of the other "fees". It will make the differences in the loans much more clear. Also someone paying you rent can help your savings rate but NEVER count on that income when getting a mortgage. Banks won't and neither should you.

[Drob8]

Remember that the property tax, homeowners insurance, and HOA are all being estimated here and can change over time (but should be the same for either loan estimate).

While the conventional has a higher rate, it looks like it also has a lower mortgage insurance option (the only part of the taxes and maintenance line that should differ between the estimates) leading to the ~$50 lower total monthly payment for the conventional loan in spite of the slightly lower down payment. I believe FHA mortgage insurance is always for the life of the loan, but conventional loan mortgage insurance can often be cancelled after the loan balance falls bellow 78% of the purchase price (you might want to check the details on this). I can't see any reason to choose this FHA loan over this conventional loan; but there could be other closing costs differences that are not shown on these estimates.

Thanks @robartsd , that is one of my main concerns exactly. the PMI on the an FHA loan is for the life of the loan as you mentioned above, on the other hand, the conventional PMI would be cancelled once I reach 20% equity

[Drob8]

I'm not a financial whiz, and I'm sure better brains will be along, but I would continue to rent an apartment (assuming that's what you're doing now) and pay off your debts. I'd save more money for a down payment, and also try to find a cheaper house. Looking at your figures, it looks like you're not going to own your house--the house (i.e. the lender) is going to own you. There's the old rule of thumb that your house should cost no more than two and a-half times your income: So your income is $75,000...your house should be no more than $187,500. I've bought and sold six houses in my lifetime, and invariably found that I "qualified" for around twice the amount I actually felt would be affordable to spend for a house.

+1

You don't say how much cash you have available...

@frugaliknowit  20k cash available .. Thanks!

[frugaliknowit]

What kind of rent are you paying now?

I would either do 10% down on a ~$200kish property (with PMI, unfortunately) or continue to rent.

I would NEVER do FHA (those fees suck the blood out of you...).

[Dicey]

Save until you have a bigger DP or buy less house, or both. Utilities and insurance can be disproportionately high in FL, are you accounting for them adequately?

I've done the roommate thing, the 50% of net income thing (do-able but not easily), and even paid PMI on my first mortgage. There's a lot of hard-earned wisdom in my lead sentence.

[Drob8]

What kind of rent are you paying now?

I would either do 10% down on a ~$200kish property (with PMI, unfortunately) or continue to rent.

I would NEVER do FHA (those fees suck the blood out of you...).

Rent @ my current place is $150O but I pay half of it(Roomate) , rent has been skyrocketing around this city lately. Yes, I want to avoid FHA loans as wells for the same reasons. 

[Drob8]

Save until you have a bigger DP or buy less house, or both. Utilities and insurance can be disproportionately high in FL, are you accounting for them adequately?

I've done the roommate thing, the 50% of net income thing (do-able but not easily), and even paid PMI on my first mortgage. There's a lot of hard-earned wisdom in my lead sentence.

You are correct Utilities and insurance are disproportionately around here. Yes, 300k is the MAX the lender approved me for but definitely would have to go for properties way lower than that.. Thanks for the input @Dicey

[Dicey]

You're welcome. I bought my first house with PMI and only had $6k to spare to fix it up so I could rent it out. I did it, but it wasn't easy. I should probably add that I bought this first house (1988) in a more affordable area than where I actually lived. I had some crazy idea that I could commute it, but that idea died quickly. After fixing it up on a shoestring, I decided to keep my cheap, rent-controlled apartment (with a roommate) and rent out the house. I wanted a house badly enough to pay PMI  (DP was just slightly below 20%). In hindsight, I should have borrowed enough to avoid it, but 1. Pride and 2. At least it was cheap.

In the end I did fine (it was my next one that was 50% of net, but I make a killing on it), but it's stress one really doesn't need.

I am FIRE because of RE, however, had jlcollinsnh been around back then, I might have dumped it all in cheap-ass ETFs and come out ahead.

[robartsd]

Our house was 2.88x gross annual income, we put 5% down. I'm glad we backed out of the house that was 3.37x gross annual income that we had an accepted offer on. I can't imagine trying to pay for a house that is 4x gross annual income.

PITI was close to 30% net income at time of purchase, but income has increased (~2 years) so it's almost down to 25% net income. Removing PMI (~$55/mo) would drop it below 25% current net income.

At the time of purchase we had an auto loan (premustachian, manual transmission Corolla < 2 yo when we purchased) and student loans (all under our mortgage rate of 3.75%) which accounted for about 9% of net income. Still paying on these loans, but the last of them is scheduled to be paid off in about 2 years from now. No new loans since the mortgage.