FHA vs borrowing 20% down payment for conventional from family

[Anonymous]

Question for the knowledgable folk here:

I'm scheduled to close on my new condo on July 23rd here in Texas. The purchase contract is for $157k with $4k in closing costs paid by seller.

I have been approved for a 30-year fixed FHA loan with 3.5% down payment at 3.625% with 0 points. Up front mortgage insurance is $2600 (rolled into the loan) with $157/mo MI premium. My broker has told me that the mortgage insurance premium must be paid on an FHA loan for either at least the first 5 years or until I have at least 20% equity, regardless of whether I make a 3.5% or 20% down payment (i.e. even if I immediately have 20% equity I still have to pay mortgage insurance up front and for 5 years). Is this true?

In the eleventh hour, my mother has offered to lend me the 16.5% I would need for a 20% down payment with no fees over 10 years at 4% interest for 3 years and then 5% for 7 years. Until now, a conventional mortgage was never even on my radar. I asked my broker to compare and he quoted me 4.00% interest on a 30-year fixed conventional mortgage. He said that my credit score (735) meant a 1/8 % rate increase and that condominiums built before a certain year in Austin (1970-something?) with less than 25% down warranted another 1/8 % rate increase.

I would be paying my mother $264/mo initially and then slightly more after 3 years as opposed to the $157/mo mortgage insurance premium and reduction in principle and interest of the up front mortgage insurance premium ($2600) and 16.5% of the original FHA loan amount.

I'm in nursing because I'm admittedly terrible at math. I'm trying to figure out which one would result in the lower monthly payment and what my true savings would be going the conventional loan route.

If I kept the mortgage for 30 years I would obviously save the most, but what if I only planned on keeping the property for 10 or 15 years? Frankly, this whole process has been exhausting and I'm not thinking as clearly as I was at the beginning of the process. Luckily I can afford either one and I'm not buying outside of my means. I know I'll just be upset with myself a few years down the line if I ultimately picked the more expensive option.

Any thoughts you guys have would be appreciated.

Dave (first-time home buyer)

[Sakuji]

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@Anonymous wrote:

Question for the knowledgable folk here:

I'm scheduled to close on my new condo on July 23rd here in Texas. The purchase contract is for $157k with $4k in closing costs paid by seller.

I have been approved for a 30-year fixed FHA loan with 3.5% down payment at 3.625% with 0 points. Up front mortgage insurance is $2600 (rolled into the loan) with $157/mo MI premium. My broker has told me that the mortgage insurance premium must be paid on an FHA loan for either at least the first 5 years or until I have at least 20% equity, regardless of whether I make a 3.5% or 20% down payment (i.e. even if I immediately have 20% equity I still have to pay mortgage insurance up front and for 5 years). Is this true?

In the eleventh hour, my mother has offered to lend me the 16.5% I would need for a 20% down payment with no fees over 10 years at 4% interest for 3 years and then 5% for 7 years. Until now, a conventional mortgage was never even on my radar. I asked my broker to compare and he quoted me 4.00% interest on a 30-year fixed conventional mortgage. He said that my credit score (735) meant a 1/8 % rate increase and that condominiums built before a certain year in Austin (1970-something?) with less than 25% down warranted another 1/8 % rate increase.

I would be paying my mother $264/mo initially and then slightly more after 3 years as opposed to the $157/mo mortgage insurance premium and reduction in principle and interest of the up front mortgage insurance premium ($2600) and 16.5% of the original FHA loan amount.

I'm in nursing because I'm admittedly terrible at math. I'm trying to figure out which one would result in the lower monthly payment and what my true savings would be going the conventional loan route.

If I kept the mortgage for 30 years I would obviously save the most, but what if I only planned on keeping the property for 10 or 15 years? Frankly, this whole process has been exhausting and I'm not thinking as clearly as I was at the beginning of the process. Luckily I can afford either one and I'm not buying outside of my means. I know I'll just be upset with myself a few years down the line if I ultimately picked the more expensive option.

Any thoughts you guys have would be appreciated.

Dave (first-time home buyer)

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Hi!

You can try using the ff calculators to build up different scenarios. I am also bad in math but keep in mind that different calculators out there have their own limitattions.

The whole website itself is a good read.

Hoping to be of some help.

[DallasLoanGuy]

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@Anonymous wrote:

Question for the knowledgable folk here:

I'm scheduled to close on my new condo on July 23rd here in Texas. The purchase contract is for $157k with $4k in closing costs paid by seller.

I have been approved for a 30-year fixed FHA loan with 3.5% down payment at 3.625% with 0 points. Up front mortgage insurance is $2600 (rolled into the loan) with $157/mo MI premium. My broker has told me that the mortgage insurance premium must be paid on an FHA loan for either at least the first 5 years or until I have at least 20% equity, regardless of whether I make a 3.5% or 20% down payment (i.e. even if I immediately have 20% equity I still have to pay mortgage insurance up front and for 5 years). Is this true?   Yes.

In the eleventh hour, my mother has offered to lend me the 16.5% I would need for a 20% down payment with no fees over 10 years at 4% interest for 3 years and then 5% for 7 years. Until now, a conventional mortgage was never even on my radar. I asked my broker to compare and he quoted me 4.00% interest on a 30-year fixed conventional mortgage. He said that my credit score (735) meant a 1/8 % rate increase and that condominiums built before a certain year in Austin (1970-something?) with less than 25% down warranted another 1/8 % rate increase.  I don't think that loan for the down payment will be allowable. Better to take out a purchase money second lien if you can. it can be retired later anyway you see fit.

I would be paying my mother $264/mo initially and then slightly more after 3 years as opposed to the $157/mo mortgage insurance premium and reduction in principle and interest of the up front mortgage insurance premium ($2600) and 16.5% of the original FHA loan amount.

I'm in nursing because I'm admittedly terrible at math. I'm trying to figure out which one would result in the lower monthly payment and what my true savings would be going the conventional loan route.

If I kept the mortgage for 30 years I would obviously save the most, but what if I only planned on keeping the property for 10 or 15 years? Frankly, this whole process has been exhausting and I'm not thinking as clearly as I was at the beginning of the process. Luckily I can afford either one and I'm not buying outside of my means. I know I'll just be upset with myself a few years down the line if I ultimately picked the more expensive option.

Any thoughts you guys have would be appreciated.

Dave (first-time home buyer)

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[StartingOver10]

There is more than math involved.

In the first case - you are approved for the loan and you pay for the loan without involving your Mother.

In the second case, if you run into an issue with your finances anytime before you pay off your Mother, then you affect your Mom's finances. So think about the overall situation, and its long term consequences.

Also, while you are calculating the original question, also run the calculations with different MI rates.

You can reduce the amount of the MI charged to you monthly by puting down slightly more. For example, on an FHA loan if you choose to put down 5% rather than 3.5% your MI is 1.20% rather and 1.25%

If you put down more than 10% then your MI is substantially reduced to 35 basis points rather than 120 basis points (bps) or 125 bps.

If your loan officer is saying something different - than you need to choose another lender.

[Anonymous]

Thanks so much for the information guys. I think it's best that I just proceed with the original FHA loan and if possible pay down my mortgage to 78-80% at five years. My mother would be using her retirement funds with me for an investment, I would feel awful if something happened that compromised that.

[JusdoNit]

It seem that the mortgage insurance would be cheaper than borrowing money ( and from a relative too...smh).  Plus the mortgage insurance will go down as the principal goes down.  You can pay that additional $107 you were going to pay your Mom to the principal on your mortgage thus helping getting your loan principal paid down and paid off sooner

[Anonymous]

If the loan from your parent is allowable by your lender ask him to run the rates for a 15 year fixed.  15 year FHA loans end the monthly MIP as soon as the load hits 78% Loan-to-value (not 80% as you mentioned) rather than that plus the 5 year timer on a 30 year loan. I don't know what happens to the up front mortgage insurance in this case.

That's my understanding at least.

[Anonymous]

Thanks for your response.

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@JusdoNit wrote:

It seem that the mortgage insurance would be cheaper than borrowing money.

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I don't follow your logic here. Mortgage insurance is $157/mo that isn't applied to interest or principal, essentially money that i will never see again.

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@JusdoNit wrote:

Plus the mortgage insurance will go down as the principal goes down.

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This is true, but at a threshold of 78% of the loan. Meaning my monthly mortgage insurance premium, if I understand correctly, will never be less than $120/mo. Since it's a 30-year fixed FHA and not a 15-year fixed FHA, 1.20 bps is the minimum calculation for annual premiums.

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@JusdoNit wrote:

You can pay that additional $107 you were going to pay your Mom to the principal on your mortgage thus helping getting your loan principal paid down and paid off sooner

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This is very true. If I can get the principal of the loan down to 78% by that five year marker, I can get rid of the mortgage insurance entirely.

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@JusdoNit wrote:

( and from a relative too...smh)

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I'll choose to ignore this since it seems like wildly inappropriate and unnecessary commentary on my family relationship. I really do appreciate everyone's free and good-willed insight on my financial decisions, and despite the fact that this is an annonymous forum on the internet where you can say things without much repercussion, let's all remember how personal of an experience buying a home is when you're going through it.

[Anonymous]

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@Anonymous wrote:

If the loan from your parent is allowable by your lender ask him to run the rates for a 15 year fixed.  15 year FHA loans end the monthly MIP as soon as the load hits 78% Loan-to-value (not 80% as you mentioned) rather than that plus the 5 year timer on a 30 year loan. I don't know what happens to the up front mortgage insurance in this case.

That's my understanding at least.

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It's funny you posted this. I just left a message for my lender asking him to run the numbers for exactly this. On a 15-year fixed FHA if I put down 10% I can get the bps to 0.30 reducing my annual premium significantly (though from what I understand I still have to pay the up front mortgage insurance premium).

[JusdoNit]

I am going thru it.  

There wasnt a comment directed towards  YOUR  relative.  It could of been anyone's relative.  Famiily and money is a bad mix.  You said so yourself.  Not verbatim, but something along the lines of...I would hate to put her in a situation if somehing was to go awry.  

  My point was and is, is that you can do it all yourself and still come out ok; Without mommy's help.

You don't have to use any of the advice.  Take what you need and toss the rest.  Or just toss it all.