FHA loan or conventional, first time homebuyer, maybe someone has some insights

[Anonymous]

My spouse and I have recently started working on buying our first home. Spouse's credit rating is excellent but he has a very low income (about 35K at the moment). My credit rating is good, with a higher income (about 150K). Due to the decent downpayment we can comfortably put on a home (25-30 percent), our lender, after reviewing our assets and credit but before finalizing paperwork, says he will be able to get us a fairly favorable interest rate, he estimates between 4.5-5 percent. (30 year fixed rate). He said we may do marginally better by going for an FHA type loan, but he said we will easily get either type of loan (conventional vs. FHA) -- the issue I suppose is which can get us a better interest rate.

We are just getting started with this process so trust me, this is a real and valid question. Is this good? How much better can we expect to do? It is important to us to keep our mortgage payment reasonable, and interest rates seem to make a big difference. My husband's income will increase next year when he returns to work full time (taking time off with the baby) but we're planning as though our income will stay flat to keep things on the conservative side. With housing prices and interest rates so low, it's hard to think of a good reason not to buy right now. I just want to make sure we are getting a favorable deal. We have never bought a home before and this kind of stuff is the personal info type stuff we wouldn't divulge to friends. I'm hoping that some generous anonymous soul out there will be able to help.

some of our specific questions are -- what are the pros and cons of conventional vs. FHA backed loans? I know that if we go with the latter, we are likely to get a better interest rate, but I understand this also comes with the requirement to purchase mortgage insurance regardless of the downpayment percentage paid (as I said, we'll be well over 20 percent). I was always under the impression that FHA type loans were for younger people with either very bad credit (way worse than mine) or no downpayment. Our lender says that is not always the case.

Can anyone offer some insight? Anyone have any good lenders they enjoyed working with? We have talked to two already, and want to get the best rate we can. TIA and hope everyone gets out to enjoy the nice weather.

[Anonymous]

We did an FHA loan because we didn't have a large down payment and because our debt to income ratio was too high for conventional financing -- FHA is a bit more lax. We both have very good credit, so that wasn't an issue. For you, it sounds like conventional would work fine and it eliminates the requirement to buy PMI if you don't need it. A 4.5-5% interest rate is an excellent rate (lower than what we got back in October through FHA), so getting a quarter to half point less probably wouldn't counterbalance the PMI requirement. The only thing about an FHA that might benefit you in the future is that it is transferable, meaning that when you sell your home, the buyer can assume the mortgage at the interest rate you have even if current rates are much higher. That may be an advantage in trying to sell your house down the road. But I'm not an expert on choosing one over the other since we didn't have a choice. I hope others respond to your question who have more experience making the choice. This is an excellent time to buy, so congrats on having a great down payment saved up!

[Anonymous]

PP here -- I should clarify that the reason we have such a high debt to income ratio is because of student loans. We are both lawyers who went to private schools (big mistake, wouldn't make it again) and DH graduated in 2006.

[Anonymous]

Thank you 16:47. I think I might have not been clear about one issue -- the FHA loan would be a lower interest rate than convention, since the govt. backing negates the few dings I have on my credit rating. It may be a few percentage points higher or lower than what he had named as our range and the conventional could be a few interest rates higher. Something about the idea of being forced to buy mortgage insurance on a home I'm paying 30 percent of really ticks me off. But I may not have a choice. Trying to figure out how much that would be.

So funny that I would want to justify myself on an anonymous forum, but here goes: the ding on my credit report is the result of co-signing a car-financing loan for a family member a few years ago (no need to remind me how big of a mistake that was!) who ultimately lost his job and came close to defaulting on the loan without ever telling me he was in trouble. The only way to keep the car out of the repo man's hands was for me to pay for the entire loan balance off, which I did by liquidating stocks. Due to me changing my phone number subsequent to signing the note, I didn't get word until the account was already in serious collections and the repo man showed up at my office. (Can you even imagine?) Ugh.

I have worked hard to eradicate this issue from my credit, but it's still there, biting me in the rear, and and will remain there for the next 4 years until the 7 year period elapses and it has to be removed. My credit score is surprisingly high given this issue, probably because I have no debt (full athletic scholarship for undergrad, TA'd my way through grad school), all of my other credit lines are respectable and paid off, I paid off my own car loan, (and ultimately did pay off his) and I have decent income and there is a note in my credit reports explaining the situation. Unfortunately, it nonetheless keeps me out of the A grade financing. I guess that's where the FHA comes into play -- maybe. A conventional loan might inflict a higher interest rate on me.

BTW, my lender has been great about keeping my credit history and my husband's totally separate so his credit is not impacted by mine. This means it's possible one of us would get an FHA type loan and one of us would get a conventional loan, but I'm still not sure how all of that would work. This area is sooooo not my forte (and my husband is even less knowledgeable about these types of issues). Wish like anything we had some family members to help us figure this out.

Are there any good online resources to sort of educate yourself about this? I hate to sell myself short, but I really need something SUPER basic-entry-level... I just have a hard time getting my brain around all of this -- it all seems so complicated and scary...

Thanks for your advice BTW!

[Anonymous]

FHA loans have higher fees. They are to be avoided if you have stellar credit and a good downpayment. Rates for FHAs tend to be a bit higher and there definitly are more closing costs. Your lender might steer you to whichever product makes him more money. Personally we only did FHA when we were first starting out and did not have cash or established credit. Conventional loans are now much more appealing.

[Anonymous]

16:47 here. Your lender should be able to run the numbers for you under both scenarios -- FHA and conventional, at whatever today's rates are -- and give you a good faith estimate of what your mortgage payments would be under each. The way our lender (Wells Fargo) did it, she presented us with very detailed paperwork that showed the amount of principal, interest, PMI, property taxes, HOA, and so forth that we would be paying monthly and annually. This was after we submitted our documentation of income and our credit report had been reviewed. The lender should be able to check what rate you will qualify for under conventional financing and prepare the same type of estimate. Then you can compare what the overall costs will be with FHA's higher fees and PMI versus a higher interest rate with conventional financing. If the conventional rate is more than a point or two higher than the FHA rate, you may be better off going that way after all.

No need to justify your dinged credit -- similar things have happened to so many people. When I moved after law school I didn't receive the final bill from the gas company, never heard from them at all despite having given them my forwarding address, and then found out that they had reported me to a collection agency several months later when I looked at my credit report! That little snafu is just now coming off my credit report seven years later. It's very annoying to have a mark on your report for something that wasn't your fault, but thankfully it won't prevent you from buying a home at a great interest rate since we're at pretty much historic lows right now.

[Anonymous]

Oh, and on closing costs -- in our case the seller (a bank, we bought a foreclosure) paid them, so that wasn't an issue. If you're buying an owner-occupied property, the increased closing costs under FHA are something else to factor into the equation.

[Anonymous]

Thank you -- very good advise. I'm concerned that this might be what the lender is doing. There doesn't seem to be that much reason to send us to FHA land -- my credit is not stellar, but it's by no means a disaster and my husband's is excellent. If necessary, we might consider getting a co-signer and using my husband's income and credit only (thereby raising the credit score but decreasing the income) instead of dealing with the higher fees. Our co-signer is an extremely wealthy family member with lots of assets and income so i don't think approval would be an issue, but we'd obviously rather do it without a non-resident co-borrower if possible.

We can put about 100K down and figure we can get the home we need at or less than 550K (possibly as low as 500K, which would make everything MUCH easier in terms of hitting that 20 percent). We could also put a little bit more cash down up front to reduce the it up to that magical 20 percent, but that would eat into our cash reserves after closing so we'd like to keep it at 100K, which would leave us with about 80K in savings in case we ran into trouble or one of us lost a job or got sick. (We have other savings, but it's not as easy to access, and we also have a decent 401K going). We have an agent and the sellers have an agent, so there would be other closing costs as well (inspection, taxes, etc). I'd like very much to avoid adding a PMI payment on top of that and just don't see why we'd go with an FHA if we didn't have to or why that would make sense given our situation. I also don't quite understand how an FHA loan's PMI works, especially if we are putting down 20 percent as it is. On what portion of the loan does one need to carry the insurance? Do you get it privately or does the govt. issue it?

So confusing. No wonder we've rented for so long!

[Anonymous]

16:47, what were the documentation requirements? This is what's confusing me / making me nervous. DH and I submitted a 4 or 5 page application online with asset information and credit but have not yet sent our stock documentation or banks statements along because I started thinking the lender was pushing a loan we might not like and I wasn't sure we should go further along the process if he couldn't give us more of an idea of what we were looking at up front. Maybe we need someone who is better at holding our hands!?

Our lender basically said he would need to take our documentation to a meeting with the underwriter to see what they could offer us and what the mortgage insurance would look like and so on. The lender came highly recommended from friends of ours who used him and said he got them a great rate, but we were planning to shop around, as well. We may end up not going with this guy. I just don't know that we need an FHA loan and do not want to get ourselves under water with a mortgage payment b/c we're stuck paying b.s. mortgage insurance on a home we're going to put about 20 percent down on... Gah, credit can kill you, it seems.

[Anonymous]

OP - Are you dealing with a mortgage broker or a lender? Have you looked at the Mortgage Professor's website? I think that is the best source of unbiased comprehensive information about getting a mortgage. You do need to be careful about using a mortgage broker, because they mark-up the rates they offer in order to earn their money. For example, we were going to go with a mortgage broker that a good friend recommended, and then I decided to shop around and found a rate nearly 1% less from Wells Fargo. Mortgage brokers are good for certain people who need complicated or hard to get loans, but you may be better shopping directly with lenders yourself. The other thing you need to be careful with in picking a lender is closing costs, which can eat up thousands of dollars, more if you're paying points. We used Pentagon Federal Credit Union for our second house purchase (you don't have to be in the military to join), which is a big favorite on the refinancing blogs because of their lower costs. When we looked back at our settlement sheet from our first purchase, we were astounded at what kind of junk fees we paid for that closing.

[Anonymous]

Anonymous wrote:OP - Are you dealing with a mortgage broker or a lender? Have you looked at the Mortgage Professor's website? I think that is the best source of unbiased comprehensive information about getting a mortgage. You do need to be careful about using a mortgage broker, because they mark-up the rates they offer in order to earn their money. For example, we were going to go with a mortgage broker that a good friend recommended, and then I decided to shop around and found a rate nearly 1% less from Wells Fargo. Mortgage brokers are good for certain people who need complicated or hard to get loans, but you may be better shopping directly with lenders yourself. The other thing you need to be careful with in picking a lender is closing costs, which can eat up thousands of dollars, more if you're paying points. We used Pentagon Federal Credit Union for our second house purchase (you don't have to be in the military to join), which is a big favorite on the refinancing blogs because of their lower costs. When we looked back at our settlement sheet from our first purchase, we were astounded at what kind of junk fees we paid for that closing.

Thank you -- wow, lots of great info in this post and I will check out the Mortgage Professor immediately. We are going with a lender, not a broker, but we're still concerned about closing fees and especially reluctant to pay mortgage insurance when we're going to put 20 percent down -- especially since FHA loans have 2 different shocks on that. I'm also getting very frustrated with the lender because he is not really answering my questions very well. We have given them preliminary info but are waiting on tax returns (bad timing -- our 08 returns are with the accountants at the moment). We are going to shop around. I have a credit union, but they are slow as molassas and in the interim, we were wondering if what this particular lender is telling us will be true of all lenders (especially given the marks on my credit record). We are, however, checking with my credit union and wanted a third source -- I may investigate the Pentagon FCU to see what they have to say. If everyone says the same, we don't qualify for a convetnional loan with our situation, we'll go the co-signer route.

[Anonymous]

16:47 here. The documentation that we provided, if I remember correctly, was two bank statements, two pay stubs, and the past two years of tax returns. This was back in October. We didn't shop around for a lender since the FHA rate is the same no matter what lender you're with. But you bring up a good point -- I've always been reluctant to do too much comparison shopping for such things because you don't want too many people pulling your credit report within such a short time. I've always worried that would affect our credit scores.

Like I said, though, the only way to know which type of financing is a better deal for you is to get the full good faith estimates for each and compare the cost. Of course, going the cosigner route would likely help you get the best rate on the conventional, in which case that would probably be the better deal. I understand your reluctance to do that, though.

[Anonymous]

I was told that when loan shopping, the FICO score is not affected anymore by several as opposed to one company pulling your report if it is within a 45 day period.

I took a home buying class recently and they said this several times.

[Anonymous]

Anonymous wrote:I was told that when loan shopping, the FICO score is not affected anymore by several as opposed to one company pulling your report if it is within a 45 day period.

I took a home buying class recently and they said this several times.

This is OP -- I understand that the comparison shopping will not hurt credit or FICO scores. Thanks for all of the info, 16:47 and others. The documentation they want from us is the same, plus information about our stocks. I guess that's to be expected, but we remain annoyed with the lender, who seems reluctant to answer any questions (such as, point blank, does an FHA cost more than a conventional loan?) without any of the documentation. He says we'll get approved, so I'm not sure if he doesn't want to invest the time if we're still comparison shopping or what, but I'm about to take my business somwhere else. This is difficult and we are learning quickly, but maybe we need someone who will hand hold us a little bit more!

[Anonymous]

OP, I would absolutely not use a lender who will not provide you with information about the costs of a loan. There are too many other lenders out there for you to use to put up with that b.s.