Conventional vs USDA loan?

Discussion in 'Community Discussion' started by dukebound85, Jun 16, 2014.

  1. dukebound85 macrumors P6

    dukebound85

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    #1
    I am buying a place. If some of you recall last year, I was under contract and backed out due to inspection. This time, I am buying a new construction!

    At any rate, this area has the possibility for a USDA loan. What are your thoughts? It is somewhat appealing as it is 0 down. I think I heard that you can't use a house bought with USDA as an investment property at any time, even if you move in 10 years and want to rent it out. Is this true? Online is contradicting and my lender didn't know.

    Additionally, I have the following finance options with a conventional with 5% down

    1) 4.25% with PMI (about 91/month) and no lender credit (1353/month payment)
    2) 4.625% with lender backed PMI (1307/month payment) and no lender credit
    3) 4.75% with lender backed PMI (1323/month) with 2k lender credit

    Which would you advise?

    I was able to lock my rate in so that is good! I can choose amongst any of these 3 if I stay with conventional.

    Thanks as always MR!
     
  2. prostuff1 macrumors 65816

    prostuff1

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    #2
    I had a quick read up on USDA loans here: http://themortgagereports.com/14969/usda-loans-home-mortgage


    From what I can tell a USDA loan can only be applied to a primary residence. So the answer to your question about using the property as a rental is: No, you can not use it as a rental at any point in time so long as you are still under the USDA loan.

    If you decide to move but want to keep the house as an investment you would need to take out another loan, likely conventional, for the remaining balance of the USDA loan which would essentially pay off the USDA loan.


    Unless you have things to do to the house right away I suggest putting down as much money as you can. At least with a conventional loan if you are are borrowing less than 80% of the cost of the house then they usually waive the insurance related stuff.
     
  3. snberk103 macrumors 603

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    #3
    Whatever kind of mortgage you end up getting, in the first year or 3 make every effort to make the maximum privilege payments possible. It is the reverse of compounding interest... every dollar you can save off the loan in the first few years is compounded over the course of the loan. A few thousand dollars extra in the first years can cut years off the mortgage. Building that kind of equity in your home early on can give you an amazing amount of flexibility later. I am speaking from personal experience.

    Congratulations on the home purchase!
     
  4. sdilley14, Jun 17, 2014
    Last edited: Jun 17, 2014

    sdilley14 macrumors 65816

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    #4
    Personally I would go with USDA. 0% down payment, and the mortgage insurance that is attached to USDA loans is about half of what is charged for PMI on a conventional loan in the 95% - 90% LTV range (I believe USDA has a .40% mortgage insurance premium while the PMI at this LTV range on a conventional loan is .78%). I'm not sure what the rates are like on the USDA loans right now, but I'm guessing they're right in line with conventional.

    As far as the option of turning the place into a rental if you purchase it using a USDA loan product - I don't know. I really doubt it. There might be some sort of waiting period (3-5 years?), but to say that you can't buy a house using a USDA loan product and turn that place into a rental at some point, sounds off to me. I could see not being able to buy a house on a USDA loan and turning it right into a rental while it is still USDA backed, but that's about it. Meaning you would have to refi it to a conventional or FHA to turn it into a rental.
     
  5. Koodauw macrumors 68040

    Koodauw

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    #5
    is the $1353 including the $91 for PMI? 30 yr fixed rate loan? Also is the payment including escrow for taxes or is it just P&I?
     
  6. dukebound85 thread starter macrumors P6

    dukebound85

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    #6
    The 1353 includes PMI and insurance/taxes and is 30 years fixed
     
  7. Koodauw macrumors 68040

    Koodauw

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    #7
    I guess If I woke up in your shoes, I would choose the first option, and throw any extra cash I could find at the debt. Once you get to 20% equity, you should be able to drop the PMI.

    I'd do that with a plan on refinancing to a 15 year mortgage as soon as I could make the payment.
     
  8. dukebound85 thread starter macrumors P6

    dukebound85

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    #8
    While I have a notion of what specific performance is, do any of you have experience of what it can result it?

    For instance, say I were to back out (don't plan on it), could I be forced to close on a house?

    Here was a clause in my contract. The builder says they have never enforced it but I am wondering what the potential is.
     

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  9. prostuff1 macrumors 65816

    prostuff1

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    #9
    Good advice

    I did this on my load. I had a fairly high percent when I first moved into the house and once rates dropped, about 3 years after buying my house, I refinanced to a 20 year fixed at nearly the same monthly payment. Dropped 7 years off the loan and am paying all of 10 more per month. I tack on extra to each payment in a hope to pay it off early.
     
  10. sdilley14 macrumors 65816

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    #10
    I would have an attorney look at that to help translate it.
     
  11. smithrh macrumors 68020

    smithrh

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    #11
    Specifically, one that deals in real estate.
     
  12. dukebound85 thread starter macrumors P6

    dukebound85

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    #12
    What? you guys don't want to be armchair real estate attorneys for me?

    Haha yes, that is good advice:)
     
  13. Macky-Mac, Jun 24, 2014
    Last edited: Jun 24, 2014

    Macky-Mac macrumors 68030

    Macky-Mac

    Joined:
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    #13
    sure why not......it means they can SUE YOUR PANTS OFF !!!!!

    I suspect that most likely the builder would just keep your earnest money......unless you've had them do a lot of custom changes, or they're in bad financial shape

    But do get a real lawyer to look at it.
     
  14. imaketouchtheme macrumors 65816

    Joined:
    Dec 5, 2007
    #14
    About the 20% thing....that no longer applies. Government backed loans do not remove PMI anymore once you reach 20% equity. Apparently this start in May(ish) of last year. You can refinance the home through a standard lender if you've reached 20% equity and you won't have PMI anymore.
     
  15. ejb190 macrumors 65816

    ejb190

    #15
    The conservative advice on home loans I have seen goes something like this:

    1) Be debt free.
    2) Have savings of 3-6 months of expenses.
    3) Save up your 20% down
    4) 15 year conventional mortgage where the payment is no more then 25% of your take home pay.

    Let me tell you, having that much of a financial buffer was a lifesaver when my furnace and AC went out and my wife totaled her car all in the same year!

    Some people will tell you to get a 30 year and pay it like a 15. To that I say, just get the 15 so you HAVE to pay it like a 15 and you get the better interest rate as well!
     
  16. sdilley14 macrumors 65816

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    #16
    I believe it actually does drop off at 78% LTV.
     
  17. Koodauw, Jun 28, 2014
    Last edited: Jun 28, 2014

    Koodauw macrumors 68040

    Koodauw

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    Madison
    #17
    It no longer does for FHA loans. imaketoughthingymajig is correct. It is there for the life of the loan, a terrible deal for consumers.
    I see you are a Dave Ramsey fan as well.
    It really means they can sue you to force a specific action to be performed. I guess in theory they could force you to buy a house you don't want, but its probably not cost effective for them to do so.
     
  18. dukebound85 thread starter macrumors P6

    dukebound85

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    #18
    I have been rethinking my loan options. The USDA would effectively be at a lower rate but would have a larger loan (2% fee financed into loan) resulting in the same monthly payment as a conventional.

    The plus would be that I keep my downpayment. Downside is that I do not think I can rent out rooms while there with a guaranteed RD loan (though I am not sure...I think I can rent out the house with a USDA guarantee loan after living there a year....just then wouldn't be able to finance another house with a USDA)

    However, would you all still advise doing a conventional at a slightly higher rate if you could (even if the USDA loan would have you pay less interest over the life of the loan)?
     
  19. imaketouchtheme macrumors 65816

    Joined:
    Dec 5, 2007
    #19
    (I just did this process recently, and although I do not professionally work in the field, I am very well-versed in this area)

    With that being said, if you can comfortably do a conventional loan and put 20% down, DO A CONVENTIONAL LOAN AND PUT DOWN 20%. There is absolutely nothing more frustrating than paying PMI (especially for the LIFE of the loan) and you receiving zero benefit from the service.

    Let's think of it this way....(I'll use round numbers to make it easier to follow, also PMI rates do vary, so I'll just use some averages or ROUGH estimates).

    Let's say you want a home for $110,000. You put down a down payment of $5,000, so your financed amount is $105,000.

    Your PMI cost (estimate, again) EACH MONTH will be $98....NINETY EIGHT DOLLARS. Now remember, this is getting you NOTHING in return, other than the ability to finance a greater portion of the home's cost. Let's go ahead and assume you'll pay off the home in the 30 year time period you signed up for....$98(monthly PMI cost) * 12(months in a year) * 30(years of loan) = $35,280!!!!

    Thirty-five THOUSAND two hundred and eighty dollars. Look at that number again. You received absolutely nothing from that.

    So, let's look at it like this...

    Let's say the loan you took out on that $110,000 home had an interest rate of 5%. Your monthly payment (with PMI) would be $654.

    So.....if you took that $110,000 home and put down 20%, you'd be financing $88,000. Your monthly mortgage payment would be $472. Let's also go ahead and apply that extra $98 a month you have (plus you're saving a ton from interest) and apply it directly to the principal each month. You would pay off the home NINE YEARS (9, NINE, NIIIIIIINE) sooner.

    ALSO, you would SAVE $28,833 ADDITIONAL. Add that to your lesser PMI cost and that's OVER $63,000!!!!!!!!

    That's insane.

    I'm done now.
     

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