to FHA or not to FHA?

[JanF]

Hello
I'm located in LA looking to move to Portland/Vancouver area in a year or two and I'm wondering if there's anyone here who has experience with FHA loans? We almost have 20% down payment saved up and looking to buy a 250k (ish) fixer upper house  with a 75k combine income. I heard that you can get a lower rate and help with closing cost and renovation costs if you get a FHA loan but you're required to have insurance for the life of the loan?
I'd appreciate it if anyone can share their expertise!

[redrocker]

I used an FHA loan to buy my residence. I don't know if the rates were lower since there was no reason for me to compare rates with a conventional because I didn't have the necessary down-payment.

It's my understanding that FHA is the way to go when you don't have the 20% (or 25% for multifamily) down-payment. Downside of course is that you have to carry mortgage insurance (aka PMI) for a set time or until you refinance with sufficient equity.

If you can manage the 20% required down-payment I don't see any reason to opt for a loan that would require the extra upfront and monthly expense of PMI.

[Neustache]

You can do conventional with 5% down (at least you could in 2013).  You'll have PMI, but it will possibly come off totally when you get down to 78% LTV - unlike FHA where you have to refi to get that PMI off. 

Just a heads up!

[Cwadda]

Are you looking to get a single family or a multi family home? I'd recommend FHA for a multi family. It's what I'm currently doing, putting 3.5% down on a $350k house with only a $40k income. Note PMI remains for the life of the FHA loan so if you have anything less than 20% down you will have to refinance into an entirely new loan to get rid of it.

Also, FHA loans are more stringent and usually take 45 days to close. I've also found that sellers prefer not to deal with FHA buyers. Ask your loan officer to compare the different rates. From what you've said it seems like it might be best to go with conventional.

[JanF]

Are you looking to get a single family or a multi family home? I'd recommend FHA for a multi family. It's what I'm currently doing, putting 3.5% down on a $350k house with only a $40k income. Note PMI remains for the life of the FHA loan so if you have anything less than 20% down you will have to refinance into an entirely new loan to get rid of it.

Also, FHA loans are more stringent and usually take 45 days to close. I've also found that sellers prefer not to deal with FHA buyers. Ask your loan officer to compare the different rates. From what you've said it seems like it might be best to go with conventional.

I'm looking for single family. I was also thinking about their closing rule...I read somewhere that if you get their 203K loan that you have to book your builder within a certain amount of days and I wasn't sure how that would work if I wanted to do some DIY mustachian renovations

I also read that in addition to getting PMI for having less than 20% down, you need to have a separate insurance (PIM?) for the entire life of the loan. Anyone know if that's still the case?

[gardeningandgreen]

If you are planning on getting a fixer upper house FHA can be a bad idea. There are tons of requirements for FHA loans that don't apply to conventional loans. For example if there is even a little bit of pealing paint the FHA loan would be out where a conventional loan they don't care at all. Like others have said you can do a lower down payment with a conventional loan and you could use the money you would have used for the down payment to fund renovations.

[VTSlim]

I got a duplex with an FHA before they changed the rules to disallow dropping PMI.
I'm clawing my way up the LTV so I can ditch the PMI right now (dropping my effective interest rate from 4.96% to 3.75% if you count PMI as "additional interest"). The PMI sucks, but then again it's the only way I could get a home, and now I have a tenant that covers the majority of my monthly payment. Just remember that the new FHA rules mean you can't drop PMI anymore.
How long will it take you to build enough equity to refinance away from PMI? What interest rate do you think you'll get at that point?
Other than that, it's still the same calculating and decision making of any mortgage decision - how much of your income will go to the monthly payment, and what's the interest rate?

[mtn]

We did FHA, but we were in a little bit of a weird life situation--needed to move sooner rather than later, really couldn't afford rent anymore, and because of the combo of a lack of downpayment (and my not wanting to dip into my IRA) and credit scores, we were basically stuck with FHA if we wanted to buy.

Hindsight being 20/20, 9 months after the fact, it was one of the best financial decisions we could have possibly made. Including MPI, our rate is only 4.5%. On my back of napkin calculations that I did about a month ago, projecting that mortgage rates will soon be in the 5% range, we did wayyyy better than waiting until we could build our credit scores and down payment farther--again, keeping in mind that we really couldn't afford to rent anymore (Chicagoland)

[Cwadda]

Are you looking to get a single family or a multi family home? I'd recommend FHA for a multi family. It's what I'm currently doing, putting 3.5% down on a $350k house with only a $40k income. Note PMI remains for the life of the FHA loan so if you have anything less than 20% down you will have to refinance into an entirely new loan to get rid of it.

Also, FHA loans are more stringent and usually take 45 days to close. I've also found that sellers prefer not to deal with FHA buyers. Ask your loan officer to compare the different rates. From what you've said it seems like it might be best to go with conventional.

I'm looking for single family. I was also thinking about their closing rule...I read somewhere that if you get their 203K loan that you have to book your builder within a certain amount of days and I wasn't sure how that would work if I wanted to do some DIY mustachian renovations

I also read that in addition to getting PMI for having less than 20% down, you need to have a separate insurance (PIM?) for the entire life of the loan. Anyone know if that's still the case?

If you are going to consider a 203(k) loan or FHA in general, you really need a good lender. I would recommend interviewing at least 5 lenders. The lender determines how much hell you're going to go through. You need a pre-certified FHA underwriter which will speed up the process.

Remember, working with the government (Fannie/Freddie loans) is like going to the DMV, but for a house. I'm sure you can imagine how much bureaucracy there is. It's like getting a root canal.

I used FHA to buy an investment property and would recommend it for this reason. Where else can you buy a multi-family property for 3.5% down? But for a single family I would never do it again.

[CptJack83]

You can do conventional with as little as 3% down if you are a first time home buyer.  Otherwise you can do 5% (rates are little better with 5% as well).  You can even do what is called Lender Paid PMI where you don't personally pay PMI and the rate isn't that much higher (the payment is definitely lower)

 FHA is good for Multi-family and if you have a low credit score/had a BK or short sale recently (as the seasoning requirements are less).  Otherwise if you have good credit (>700) on a single family there is no good reason to do FHA.

If I were you.  I'd go conventional with 3/5% down and use the rest of the money you have saved for renovations.  By paying cash for renovations you don't have to deal with the red tape of it being tied to your loan and can do a lot more DIY type stuff.

The problem with 203(k) on a purchase is that you have to have all the contractors/bids lined up prior to closing.  In a hot competitive market (or even a normal one) the seller is not going to want to wait for you to get all this in order.  A 203k is best as a refinance.  Also a 203k has a lot of rules and restrictions on the renovations.  If you are trying to do a lot yourself its problematic.

If you just pay cash for the reno and put a small DP on a conventional loan you get the best of all worlds.

[Gr8ful]

You are correct that FHA does have lower rates that a conventional loan, but you will have Mortgage Insurance...for the life of the loan.  If you do put 20% down I would bet a conventional loan will have a lower monthly payment.

If you are concerned about closing costs you can always ask the seller to contribute x% (Limit is 6%, "norm" is 3%) at closing to cover them.  You finance more, but you have less out of pocket.  Or your lender should be able to have them covered in the loan, but that will raise the interest rate a little.  A good lender can go over the options they have with you to cover costs and you can see what works best for you.

FHA 203k loans are not the only rehab loans out there.  The conventional product is the HomeStyle Renovation loan, works almost exactly like the FHA 203k. Not too many brokers want to deal with them, but it really is not too difficult, other than more paperwork and a longer closing process.   MI drops off at 80% Loan to Value, but it sounds like you would be putting 20% down so it would be moot.  The big issue with either reno loan, at least for you, is that you can not do the work that the loan will be used for.  You need to have a contractor do the work and have an appraisal done showing all work is completed. You also are "required" to have all the work completed in 90 days, I have had some go longer, but there were reasons that drew it out and the lender needed to approve .  If you plan to do the work yourself, I would probably not go that route.

Putting less down and going conventional with MI might be a great route for you.  Once you have completed your renovations (using the down payment you have) you can have the lender remove MI after the LTV is less than 80%.  That way you can choose what work you will do and at your own pace.  You would probably need to have another appraisal, but the long term savings would make it pencil out.

Good Luck