By Frederick Blum, Broker/Owner of Blum Realty Group
A San Diego buyer can be approved for an FHA loan and still be better served by a conventional loan. The reverse can also be true. What matters is how the two loans compare in cost and flexibility for your actual purchase, with the same property, budget and closing date in both.
I would make that comparison before writing an offer. Once you are in escrow, a change in financing can affect the appraisal, the paperwork and the closing schedule. A little work at the beginning gives you a clearer price range and a better understanding of the cash you need to keep after closing.
Start with two quotes for the same purchase
Ask a licensed lender to evaluate both options using the same purchase price, property type, occupancy, loan term and approximate closing date. If one proposal uses substantially more down payment, request another comparison using the cash you actually intend to spend.
According to the Consumer Financial Protection Bureau’s FHA overview, FHA financing can allow a down payment as low as 3.5% and may be competitive for borrowers with smaller down payments or lower credit scores. Borrowers with stronger credit should also look closely at conventional financing.
Conventional does not automatically mean 20% down. Certain eligible buyers can use a HomeReady mortgage with as little as 3% down, subject to the program’s requirements. Other conventional options have their own eligibility and down-payment rules. Ask which program the lender is actually quoting.
The question I would put to the lender is specific: “For this property and this amount of available cash, what makes one option better for me, and where can I see that difference in the numbers?”
Separate the down payment from the amount needed to close
A down payment is only one part of the initial expense. Closing costs, prepaid items, the opening escrow deposit and any financed charges also need to be accounted for. Then there is the money you want available after the keys are delivered.
For a hypothetical $700,000 purchase, a 3.5% down payment is $24,500. That calculation tells you the down payment. It does not tell you the final wire amount, the approved loan balance after any financed premium, or whether the purchase leaves you with adequate reserves.
If a buyer qualifies for a 3%-down conventional program on the same $700,000 purchase, its down payment would be $21,000—a $3,500 difference. That is worth knowing, but it does not settle the comparison. Mortgage insurance, upfront charges, any program income limits and the property’s eligibility can change which option is the better fit.
Ask the lender to show the base loan amount, any upfront mortgage-insurance premium, whether that premium is financed, estimated closing costs and estimated cash to close as separate figures. Financing a charge reduces the amount paid immediately but adds it to the amount borrowed.
For San Diego buyers, the reserve question deserves attention. Moving costs, an insurance deductible, a first-year tax adjustment or a repair can arrive shortly after closing. Using the largest possible down payment may produce a lower payment while leaving the household less prepared for those expenses.
Compare the full monthly payment, including mortgage insurance
Put the two proposals next to each other and identify principal and interest, mortgage insurance, property taxes, homeowners insurance and any association dues. Also identify expenses that will be paid separately from the lender’s monthly bill.
A proposal showing a lower interest rate can still have a higher total monthly cost. Equally, a proposal with a slightly higher principal-and-interest payment may have a different mortgage-insurance cost or a lower upfront expense. Look at the complete proposal before deciding which number matters most.
Use a quote for the actual home’s insurance whenever possible. A placeholder can make both loan estimates look manageable while understating the cost of the property. My guide to obtaining insurance answers before removing contingencies explains what to confirm while purchase deadlines are still open.
Keep your own budget for the home separate from the lender’s qualification calculation. A lender may approve a payment that leaves less room than you want for childcare, retirement contributions, irregular income or a future repair. Those are reasons to choose a different price range or financing structure, even when approval is available.
Understand when the mortgage insurance can end
The duration of mortgage insurance can change the longer-term comparison. Under HUD’s rules for FHA case numbers assigned on or after June 3, 2013, annual mortgage insurance generally lasts 11 years when the original loan-to-value ratio is 90% or less, and for the loan term when the original ratio exceeds 90%.
Conventional borrower-paid private mortgage insurance follows different rules. For covered loans, the CFPB explains the right to request cancellation at 80% of the home’s original value, subject to requirements such as current payments and an acceptable payment history. Automatic termination generally happens when the balance is scheduled to reach 78% of the home’s original value, if the borrower is current. Investor rules may also provide other cancellation options.
Ask for the applicable rules in writing. Do not make the purchase depend on a refinance happening in a particular year. A future refinance requires acceptable qualifications, property value and loan terms at that time, along with another set of costs.
For planning, compare the loans over the period you reasonably expect to keep the mortgage. Include upfront loan charges, interest, mortgage insurance and the remaining principal balance. A calculation that counts every principal payment as a lost expense can distort the comparison because those payments also reduce the debt.
For a simpler first check, suppose one otherwise comparable proposal costs $3,600 more upfront and reduces the full monthly payment by $100. It takes 36 months of that payment difference to recover the additional cash outlay. That is a cash-flow break-even illustration, not a complete loan-cost calculation: principal balances, mortgage-insurance changes and the time you actually keep the loan still belong in the final comparison.