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Old 06-17-2009, 11:23 AM
 
125 posts, read 633,102 times
Reputation: 55

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Hello All!

First Time Homebuyer here with a simple (I think) mortgage question. I feel like I keep researching and researching – but I still have this one question. If FHA rates are generally higher than conventional loans, whats the point of getting an FHA? I understand that FHA only requires the 3.5% down.. but say you have 10% to put down… if you put 10% down on an FHA or 10% down on a conventional – you still have to pay PMI, so what’s the benefit of FHA if their rates are higher?

I have a credit score of about 740, a pretty good paying job, and about 10% to put down (yes, with add'l money to pay closing costs and $$ in savings for my emergency fund)… would it make sense to do FHA and only put the required 3.5% down and use some of the leftover money to pay points..or perhaps just keep some in savings? Is FHA only good for those that only have 3.5% and don’t want to put down more?

I think I’ve heard somewhere that FHA loans are assumable and don’t charge prepayment penalties… but I’m not 100% sure if that’s true.

Thanks!
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Old 06-17-2009, 11:34 AM
 
1,114 posts, read 2,341,367 times
Reputation: 702
The benefit behind the FHA is the ability to get a home w/ ~3.5% down. If you have a bit more, you can get the broker to list out both options for you to figure out which is more cost effective. My broker listed it out and the FHA's biggest benefit was the cheaper PMI costs (approx 1/2 of a conventional). FHA tends to have stricter underwriting which means they only lend on specific buildings/homes, length of employment requirements, and some additional fees that can be rolled into the mortgage. As for the prepayment...my understanding is that its the same as a conventional mortgage.

I wound up going w/ a full 20% down myself.
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Old 06-17-2009, 11:40 AM
 
Location: Grant Park
69 posts, read 292,101 times
Reputation: 25
I just went through this same dilemma. I ended up going FHA because I didn't have the full amount 10% to put down (had about 7%) - but if I did have the full 10%+ I would have gone conventional.

The reason the FHA mortgage insurance is cheaper is because you pay a 1.75% premium (of the loan value) up front that is rolled into the loan balance.

But cash is king - so if you need the cash - I'd keep it and go FHA - if you don't - then go conventional.

Yes the loans are assumable and with interest rates trending up - that could be a very valuable selling point in the future. And mine has no pre-payment penalties.
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Old 06-18-2009, 01:03 PM
 
Location: Raleigh, NC
3 posts, read 7,313 times
Reputation: 10
Another benefit of FHA is that there are not as many loan level adjustment to the pricing. So while going with conventional financing since you may have 10%down, when all the pricing adjustments for loan amount, LTV, credit score, etc are calculated you may actually arrive at a higher rate than had you gone with FHA and FHA actually has a bit more flexible underwriting guidelines compared to conventional.
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Old 09-13-2010, 11:48 AM
 
1 posts, read 3,643 times
Reputation: 11
If anyone out there is getting a loan WITH a pre-payment penalty...then you better watch out with whom you are dealing. Sounds like a scam. Pre-paid loans are out the window. The question about whether to go FHA or Conv should be that if you can pay 5% down...you should go conventional...especially with your credit score. Conventional has a lower interest rate...no brainer. One reason people like FHA is because it is insured upon itself...so, in rough times, you could refi your loan with them...and only because it is govt backed. Some conventional loans are govt backed...but certainly not most. Less paperwork for conv loans. The 100 percent loans are history for right now...but, that was another reason to do conv. The 80/20, which was really good because no matter whether you paid off your 20% second mtg...which meant you had NO DOWN PAYMENT...you could borrow against it. Therefore, it was like a credit line. So, you could buy a car, for instance, then your car would be tax deductible because it came as a result of your home loan...ok, guess I really told you all a little too much.
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Old 09-15-2010, 03:57 PM
 
9 posts, read 48,780 times
Reputation: 13
Another difference is the home inspections. Both loans require them, yet we were told by our realtor that FHA loan holders properties are looked at more closely during the inspection process than Conventional... as the FHA is Govt' backed. We are conventional buyers, so we were able to look at foreclosed properties that might need more work, and would not pass an FHA inspection.
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Old 09-15-2010, 04:36 PM
 
876 posts, read 2,269,393 times
Reputation: 266
In most cases, I would go with conventional, even if you have to put down a larger down payment. If you are buying any home (especially an older home), something may go wrong, so if you don't have additional savings, or you forsee a financial problem in the near future then go with FHA.

FHA has a lot of restrictions you can research online; most of which are cited above. If you ever decide to rent your property out in the future, FHA may not allow you to do that if you wanted to. I think there are restrictions with refinancing, too, but not sure what those are. If you buy a home in a short period of time, less than 30 days, securing an FHA loan could take more time than a conventional because of more paperwork.

FHA is subsidized by the US federal government, so with that comes a lot more paperwork, bureaucracy and ultimately restrictions.
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