Sunday, August 24, 2014

FHA loan vs. 10% Down Payment Conventional Loan vs. 20% Down Payment Conventional Loan


I would like to start getting into investment property in the future but for now I am absorbing as much information through reading books. I just finished reading the “ABCs of Real Estate Investing” and I am waiting for “Buy It, Rent It, Profit!” to come in the mail. The cost of buying an investment property varies depending on many factors. I am an absolute beginner to real estate investing but I recently developed 3 tables for what the expenses could look like for a $125,000 home in my area, assuming a 4% interest rate.  Here are the examples of the mortgage programs available to me.

FHA Loan
Expenses
Estimated Cost
Down Payment (3.5%)
$4,375
Closing Costs (3%)
$3,750
Emergency Fund (6 months of Expenses)
$8,100
Property Tax (Based on a home I looked at)
$2,578
Maintenance (2%)
$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)
$1,750
6 Months of Mortgage (In case of emergency)
$4,236
Home Inspection (Estimate)
$200
Home Appraisal (Estimate)
$375
Attorney (Estimate)
$600
Total
$28,464
Mortgage
$706

 FHA (Federal Housing Administration)

The FHA is one of the more popular choices among first time homebuyers. It has been a great choice for those who do not have a ton of money saved since you don’t have to have a large down payment.

Advantages

  • You only need a credit score of 580 in order to qualify

  • You can qualify with a low down payment of 3.5% of the home price

  • The interest rates compare to those of a conventional loan

  • The down payment can be gifted from a family member or friend

  • You may also borrow against your 401k for a down payment

  • No prepayment penalties

Disadvantages

  • You have to pay Private Mortgage Insurance on your home

  • Private Mortgage Insurance is harder to cancel

  • PMI fee is usually higher than compared to a conventional loan

  • Some properties aren’t approved for FHA loan financing

  • Little to no instant equity

  • Higher monthly mortgage payments
 
  • Less positive cash flow or ROI (Return on Investment)


10% Down Payment Conventional Loan
Expenses
Estimated Cost
Down Payment (10%)
$12,500
Closing Costs (3%)
$3,750
Emergency Fund (6 months of Expenses)
$7,860
Property Tax (Based on a home I looked at)
$2,578
Maintenance (2%)
$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)
$1,750
6 Months of Mortgage (In case of emergency)
$4,002
Home Inspection (Estimate)
$200
Home Appraisal (Estimate)
$375
Attorney (Estimate)
$600
Total
$36,115
Mortgage
$667

 
Conventional Loan with 10% Down Payment

This conventional loan is great for a homebuyer who has some cash on hand but doesn’t want to empty his savings account. A conventional loan adheres to the guidelines set by Freddie Mac and Fannie Mae. The federal government does not insure these types of loans.

Advantages

  • You will receive a competitive fixed interest Rate

  • The Private Mortgage Insurance fee is much less

  • Closing costs on your home our lower when compared to an FHA loan

  • You can cancel PMI once your Loan to Value reaches 80%

  • This type of loan can be used on all property

  • You can hold numerous conventional loans at a time

  • Nearly every bank offers Conventional loans so your options are open

  • Higher equity unless your house is worth less than you paid for it

Disadvantages

  • You are forced to pay Private Mortgage Insurance

  • You need a credit score of 680 or higher to qualify

  • More difficult to qualify than the FHA Mortgage program

  • There could be a prepayment penalty

  • Higher down payment

20% Down Payment Conventional Loan
Expenses
Estimated Cost
Down Payment (20%)
$25,000
Closing Costs (3%)
$3,750
Emergency Fund (6 months of Expenses)
$7,500
Property Tax (Based on a home I looked at)
$2,578
Maintenance (2%)
$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)
$1,750
6 Months of Mortgage (In case of emergency)
$3,642
Home Inspection (Estimate)
$200
Home Appraisal (Estimate)
$375
Attorney (Estimate)
$600
Total
$45,395
Mortgage
$607

 Conventional Loan with 20% Down Payment

This program is very similar to the 10% Down Payment mortgage. This used to be the required down payment a long time ago, but these days a 20% down payment is avoidable. The same pros I mentioned for the 10% down payment type of loan also apply to this type of mortgage program. You also get a whole new list of advantages.

Advantages

  • You immediately start with a good amount of equity with 20% down

  • The closing costs are much lower and may be waived by seller

  • You are no longer require to pay a Private Mortgage Insurance

  • Lower monthly mortgage payments

  • You will receive the best-fixed interest rate

  • Smaller mortgage makes it possible to get a 15-year mortgage with lower interest rate

  • You get a better return rate and positive cash flow on your investment property

Disadvantages

A large down payment is hard to come up with
 
How do you feel about these mortgage programs? Would you add any advantages or disadvantages to any one of these loans?