Is there something I'm missing? cost of FHA vs. conventional

[Anonymous]

Hi - husband and I are first time homebuyers. We put an offer on a house, bank-owned with multiple offers, so we may or may not get it. It would be good to figure this out anyway though.

In looking last week, FHA interest rates were lower than conventional, at about 4.5%. The way I calculated to decide which loan would be cheapest a. upfront and b. over the 5-7 years we plan to be in the house, was the following:

FHA:

FHA premium of 1.75% with 5% down

FHA mortgage insurance of .05% annually

1 point ($2900)

4.5% interest

Conventional, 30 year fixed:

20% down

4.8% interest

obviously there are lender closing costs, but those will be the same no matter what. If we stay in the house for 5 years, the FHA loan costs about $12,000 less overall. Of course, I assumed 20% down on a conventional loan. I guess my question is, it didn't occur to me that maybe we could swing a conventional loan with less than 20% down. It that even possible anymore? We have the money to do 20% down, but if it will cost less overall to put less down and have some fees...there's no reason not to. Especially since we don't have long-term plans for the house. I also didn't figure in recapture tax, which I assume applies to FHA loans. 

Our situation is this: my husband is graduating from dental school next month, and has a long-term contract with a practice (owned by his brother) for a guaranteed salary or percentage of collections, whichever is higher.  Most lenders have told us that a copy of the contract, possibly my W2s (I'm a statistician at the university where he goes), and a letter from his school explaining that he will be graduating in May will most likely help us get a loan without a work history.To obtain a loan now, our realtor suggested that his brother "give him a paycheck early" that we can tear up later, to show a salary to the lender. It all seems really stupid,but whatever. His licensure processing won't be complete until June, so to get an actual paycheck would probably put us around end of July. 

Our credit scores are 778 and 761. Is there anyway a lender would give us a conventional 30 year fixed with less than 20% down, with our situation? What is PMI (is it .05% like FHA) on a conventional loan? Are there FHA costs I haven't included or thought of? I'm concerned that putting an FHA loan in the offer might have cost us the house, but there's nothing I can really do about that now. 

Any advice would be helpful. Thanks!!

EDIT: I looked at a sticky post and here is further information that should have been included:

-For this particular house, if we get it, the loan is for $290K (as written, it was an FHA 30 yr fixed, 5% down, they pay 3% closing costs)

-Our credit scores above were pulled 5 days ago

-My husband's contracted salary is the highest of $100K or 30% of collections, which should be considerably more...paid monthly, as S-corp

-The only debt we have is student loan (which is considerable, about $250K...after consolidation, payments  which won't start until Nov 09 - will be approx. 1600/month)

-Assets are savings and we have about $55K, and could access more from parents if we needed to

-I have W2s of about $50K from the last 2 years, but I am leaving my job when he graduates and going back to grad school

-The area we are looking in is the Boise area of Idaho

Message Edited by lcinva on 03-29-2009 08:52 AM

Message Edited by lcinva on 03-29-2009 08:59 AM

[ShanetheMortgageMan]

You can get conventional with less than 20% down still, you either have to obtain PMI or a 2nd mortgage for the portion over 80% you are financing though.  PMI underwriting requirements are very strict in declining markets (Boise is probably considered one these days), but your credit appears to be fine for it.  5-10% would be the minimum down payment.  The PMI rate depends on your LTV, at 90% it's about .7% vs. FHA's .5 (at 90% LTV).  Also with FHA, terms of 15 years or less at 90% LTV do not have monthly MI, one other way you could save some money with only putting 10% down.  There is no recapture tax on FHA, only if you are using mortgage bonds or something along those lines, so if you use a special down payment assistance program from your county/city that is funded with bonds, you could face the recapture tax.

I'm not sure what you meant by "give a paycheck that would be torn up later", but providing any document to a lender that is not 100% completely legit is never a good idea - it's fraud.  So if he actually will get an early paycheck, that is great, but if he's not, don't have anything created just to get you a pre-approval.  Since your real estate agent recommended that, I hope he is just ignorant on mortgages and isn't actually trying to manipulate things.

In order to use your husbands "future employment", you will need that contract you mentioned, you will also need to close no earlier than 60 days before his employment would begin (FHA requirement), conventional probably will not be as forgiving when it comes to his employment as you'd have to get the lenders approval PLUS the PMI insurers as well - they might actually require a paycheck with a full 30 days of earnings on it (often a lender requirement too). 

[Anonymous]

Thanks for the response!

The .7% value was what I needed to know...I need to run some numbers and see which will work out. We would probably put 10-15% down if it was a conventional loan, just maybe not the full 20%.

I should have explained further about the paycheck. It would just be a situation where his brother would write the contract and hire him, and start paying him, prior to actually beginning work, for lending reasons. The fact that pay is starting prior to my husband actually beginning is something we would work out with his brother. The in-house lender and underwriter said this would be really helpful...so I presume it isn't fraud, since the lender came up with the idea along with our realtor. Does that sound ok? Even with an FHA loan, it sounded like all lenders wanted at least one pay stub, so I don't think there is any way around it, even with my W2s (speaking of, would 2 years' worth of W2s at 45000-50000 be enough to qualify for a approx 250000 loan on their own?)

We have gotten so lucky with home prices and the first time homebuyer tax credit that I guess we deserve something to be a little tricky! It makes me mad that 3 years ago my brother-in-law who is hiring my husband waltzed in right out of dental school and borrowed as much as he wanted! I guess excellent credit and no debt isn't enough in this climate...

Thanks for the clarification too about recapture tax - what I found online was kind of confusing. We have more than enough for the down payment, so as long as FHA isn't funded by any bonds, we should be ok.

Thanks again!

EDIT: As a side note, to clarify, we have already been pre-approved for the loan amount on the house we want, with an FHA loan at 15% down. My questions are in reference to actually securing financing after the offer is hopefully (!) accepted.

Message Edited by lcinva on 03-29-2009 12:16 PM

[medicgrrl]

Two questions for you 1) you mentioned the S Corp, is your husband going to be an employee or self-employed? 2) Does your employer know that you are leaving soon?  One of the questions the lender asks when they verify employment is the probability of continued employment.  This could cause an issue for you along with your husbands income if he will be self-employed

[Anonymous]

As far as the paycheck, you will need to make sure that any contract does not stipulate any "repayment or advance" clauses in regards to the paychecks.

Also to answer your question, just because your LO or even the UW brought up the idea does not mean it is not fraud.  If your husband is getting paid it is not fraud.  If he recieves a false check or has to repay the money then it is fraud.  Also, you will need to make sure that any checks your husband recieves are for the amount that his minimum guarantee is (looks like 100K) so they would probably want to see 30 days pay or roughly 8333. in income.  On this you guys will be taxed and so forth.  

I just want to reitterate.  If your brother agrees to start paying your husband early then you are definitely good to go.

Also, at 250K, you may qualify on your own.  Your DTI would probably be high, but with copensating factors such as down payment, reserves, high FICO and your husband contract for employment at 100K it would probably work out OK. 

[Anonymous]

Thanks to both of you for your comments! To medicgrrl - my husband will be an independent contractor, for tax reasons, but will have an indefinite contract as mentioned above. The lender who pre-approved us said for lending purposes maybe we should establish him as an employee, and then immediately after purchasing we can do what we want as far as a corporation. Any thoughts on this? Is a contract a contract, or will being an S-Corp change things for lending?

For continued employment with my husband it shouldn't matter...the contract is for a permanent position, until we choose to buy into the practice. All the lenders I've talked to have verified that, it's just a matter of which one wants what kind of proof he is a dentist. We will probably avoid that last part of the contract (the until we buy into the practice part) until after home purchase, so as not to aggravate things. As far as my employment goes, I never considered using it anyway because of that reason...obviously we are relocating, as he is graduating, so everyone at work knew I was only there for a few years. However, if they were looking for information about whether I had been gainfully employed, saved money, and didn't sit around on my butt for 4 years, then I've got the W2s for them.

To mickie08 - yes, it would actually be a real check. The contract would most likely be written to begin employment or payment earlier than we anticipated, and not mention anything about repayment or advance payment. Sadly enough, I guess that's one of the perks of working for family. We would just have to work that out later. Maybe I will ask about my own work history...I guess if our current offer is accepted and we go to closing in April as planned, I would be able to provide paystubs. Although, as medicgrrl pointed out, there is 0 probability of continued employment after April 30th.

I know this is just the way it is, but it seems so over the top. We have $60K in checking, my husband will be making $100K in 2 months, I've been making $50K, we have FICOs over 750, and we get grilled like we're either lying or don't know how to manage money. It's a little demeaning really...but I guess you just deal with it, right?? Thanks for all the advice so far!

As far as my original question, I have also been doing some calculating and at year 7 it would become cheaper to have done a conventional vs. FHA. Something I haven't researched a whole lot are no-cost closings (with higher interest rates)...does anyone have thoughts on those?

Message Edited by lcinva on 03-29-2009 07:41 PM

[Anonymous]

Do the loan companies know that he is being subcontracted, not offered a paid position at the firm.  There is a big difference for loan approval purposes.  If they think he is being hired by the company as a regualr employee at a minimum salary (plus any difference due to collections) that is different then being hired on as a contractor I believe.  That would be basically 1099 income If I am correct.  Int hat case they will probably want to see 2 years tax returns.  the length of the contract doesn't matter.  That is between you and your brother.  The issue may be that generally for 1099 or self employed they need 2 years w-2 income for proof of income.  I know with high down payment and high FICO's they are a little more lenient, but it is very hard to get a self employeed or 1099 loan right now without 2 years documented income.  Just make sure they are fully aware that it is 1099 income and not w-2 income he will be recieving or you may end up in a bad situation when it gets into underwriting.   

[Anonymous]

To be honest, I don't know if that was mentioned or not. All I said was that he had a contract. This is the kind of stuff that is so ridiculous, he's been in dental school for 4 years - we're supposed to wait until he's 30 to be able to buy a house? He's a dentist for crying out loud!!! And I work too!

This is probably why the underwriter suggested his brother hire him as an employee, and then after closing switch to an S-corp. This will all be done on the fly anyway, b/c if we get this house we have 15 days to get financing, and his brother will write the contract/pay him tailored to what we need. I guess we'll figure it out then!

[Anonymous]

Another question that I had, I figured I'd tack it onto this thread. Does rental history help at all? We've been renting for almost 2 years at $1025 a month, and then a year before that at $900/month, and all rent was paid on time. Do they ask about this at all? Would it help to get a letter from my landlord?

[medicgrrl]

I know it seems tedious as far as the income goes but you are looking at borrowing a large amount of money.  There is a huge difference between being an employee and being self-employed.  A large number of new businesses go out of business during the first 12 months.  Also, when you are 1099 you will have tax write-offs.  At this time they would have no idea what his actual income is due to the fact he has no returns to base it on.  If he is a regular, salaried employee then you should have no problems using the contract income with a paystub.

As far as the rental history, they use this in two ways.  1) To verify a good rental history 2) To see what type of payment shock you will have.  It sounds like neither of these should be an issue for you.  The payment shock will be offset by the fact that you have been able to save money. 

Your loan will probably go smoother than you think.  But it is always good to be prepared and know of the obstacles (such as self-employment) prior to signing a loan application.

Best wishes on your homebuying and relocation!