Less than 20% down payment, FHA with future refinance?

[HiFromSeattle]

Hi all,

I have hit some financial goals of mine (no credit card debt!, $100k income, 740 credit score -TU) and this fall I am planning to buy a house in Western Washington. Houses here are certainly not cheap and I am hoping to qualify for $400-450k loan with ~5% that I can put down.

I know that this will require me to pay mortgage insurance, which stinks, however, it stinks less than home prices here going up ~10%+ per year.

I am trying to weigh my options for this loan, as this will be my first time through the process. Because of the low down payment, my understanding is that I have two options: take a traditional loan that requires PMI until 20% of the value is paid (grown) or do a FHA and pay insurance for the entirey of the loan.

I would prefer not to do the FHA, as I am confident that home values here will continue to rise at a 7-8%/year pace for at least the forseeable future and I think I will have 20% equity in the home within 2-3 years. But if I do an FHA loan, can I refinance it as soon as I get 20% equity? Any other suggestions

Also, I inherited a house this year after my parents passed away. This doesn't take away my eligibility for first time home buyer options, correct?

FWIW:

Income: $100k (has grown ~50% over 2 years, been at company 2 years)

Debt Payments: $750 (car loan $350, student loans $400)

Credit Cards: $30k total limit (~$0 balance)

AAoA: 5 years

TU: 740

Exp: 730

Equifax: 729

No Baddies

[krielly]

Don't assume appreciation of your homes value automatically results in removal of your PMI.

the LTV ratio is based on the original loan amount, not what your house is worth at the time.

some banks will allow you to have a new appraisal done (at your expense) to support the PMI removal, but some WILL NOT remove it until you have paid down to the percentage on your original purchase amount.

Just wanted to throw that out there as a consideration.

K

[oceanbay]

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[Anonymous]

Hey there from  Portland Oregon!

I am sure someone  with more knowledge than me will chime in but I wanted to tell you I had the same decision to make a few weeks ago when I was starting the mortgatge process. I elected to go for a conventional loan  despite only having 5 percent down because of the reasons you stated above. After I pay down 20 percent of the loan PMI is easier to get ride of. Also, for some odd reason the PMI quoted was CHEAPER on Conventional than FHA.  This could have just been specific to me, but it really didn't make since for me to go FHA. As for your owning a home, someone please correct me if I'm wrong, but we're actually talking about having a home mortgage loan not necessarily the fact that you own a home. In Oregon at least you qualify for FHA if you have not had a home loan in 3 years.  So although I've had morgages in the past,  I still qualified for FHA. I'm not sure about Washington rules, however. 

[HiFromSeattle]

I am going to try and work with my local credit union (BECU) in hopes that by having a credit card, auto loan, checking and savings account with them that the relationship will mean something along with my income, employment history and credit score.

[dragontears]

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@Anonymous wrote:

Hey there from  Portland Oregon!

I am sure someone  with more knowledge than me will chime in but I wanted to tell you I had the same decision to make a few weeks ago when I was starting the mortgatge process. I elected to go for a conventional loan  despite only having 5 percent down because of the reasons you stated above. After I pay down 20 percent of the loan PMI is easier to get ride of. Also, for some odd reason the PMI quoted was CHEAPER on Conventional than FHA.  This could have just been specific to me, but it really didn't make since for me to go FHA. As for your owning a home, someone please correct me if I'm wrong, but we're actually talking about having a home mortgage loan not necessarily the fact that you own a home. In Oregon at least you qualify for FHA if you have not had a home loan in 3 years.  So although I've had morgages in the past,  I still qualified for FHA. I'm not sure about Washington rules, however. 

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Conventional PMI is based on credit score so a high score low PMI rate, FHA PMI is not based on credit score so can be higher than conventional if you have a high score (or the reverse, FHA PMI can be lower than conventional PMI if your score is low)

[StartingOver10]

^^^Exactly. Conventional PMI is based on credit score and LTV.  

Here is an example of rate cards for Genworth Mortgage Insurance (one of the few companies that issue PMI) https://mortgageinsurance.genworth.com/RatesAndGuidelines/RateCards.aspx

[Anonymous]

Here are a couple of things to consider for your situation:

Conventional:

You will have to request the PMI to come off at 80% it will automatically fall off at 78%.  You could most likely get an appraisal done to show you are at the 80% mark because they will need some sort fo proof that you are.

You will have a higher interest rate vs FHA but the MI on FHA will likely be higher 

You could look into Lender Paid Mortgage Insurance if you want.  Basically what they will do is give you a higher interest rate than what you qualify for and use the proceeds to pay all of your PMI upfront.

FHA:

FHA MI will be on there for the life of the loan if you are 95% or more LTV but only on there for 11 years if you are below that.

You get a better interest rate.

They will tack on 1.75% of your loan value for the Up front mortgage insurance

You can refinance it into a conventional loan once you think you are at the 80% mark.  You don't have to wait any certain amount of time unless you are refinancing it to another FHA which you wouldn't be doing.  The on only reason lenders don't want you to refinance for at least 6 months is because they will have to pay back everything they received when they sell your loan if it is paid off within the first 6 months.

Hope this helps.  

[Anonymous]

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@Anonymous wrote:

Here are a couple of things to consider for your situation:

Conventional:

You will have to request the PMI to come off at 80% it will automatically fall off at 78%.  You could most likely get an appraisal done to show you are at the 80% mark because they will need some sort fo proof that you are.

You will have a higher interest rate vs FHA but the MI on FHA will likely be higher 

You could look into Lender Paid Mortgage Insurance if you want.  Basically what they will do is give you a higher interest rate than what you qualify for and use the proceeds to pay all of your PMI upfront.

FHA:

FHA MI will be on there for the life of the loan if you are 95% or more LTV but only on there for 11 years if you are below that.

You get a better interest rate.

They will tack on 1.75% of your loan value for the Up front mortgage insurance

You can refinance it into a conventional loan once you think you are at the 80% mark.  You don't have to wait any certain amount of time unless you are refinancing it to another FHA which you wouldn't be doing.  The on only reason lenders don't want you to refinance for at least 6 months is because they will have to pay back everything they received when they sell your loan if it is paid off within the first 6 months.

Hope this helps.  

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It is actually 90% LTV or below where the MI will fall off at 11 years.

[Anonymous]

Correct.  My mistake.