Opportunity Knocks with an FHA Loan

Probably the biggest thing holding many first-time buyers back from getting into their starter home is the 20 percent down payment. Not only is it a big chunk of change, but it also must be seasoned.

No, not with salt and pepper, but with time. Money that has been in your control for at least 60 days is referred to as “seasoned funds.” Simply having the money in your possession for 60 days is sufficient. For instance, it might be in your Paypal account, stock brokerage account, or pension fund. You must be able to show that the funds were in your control for 60 days prior to transferring the down payment funds.

But it’s still a lot of cash. For example, The Orange County Register in California reports that a starter home could run about $680,000. That would be a 20% down payment of a $136,000.

If you were to save $24,000 a year. it would take 5.7 years to accumulate the down payment.

Fortunately there is a better way where you can put as little as 3.5% down.

Introducing the FHA loan

An FHA loan is administered by the Federal Housing Administration (FHA) and is easier to qualify for than a Conventional loan. With the FHA guaranteeing the loan, lenders are more willing to approve applications, but FHA loans are usually more costly on a monthly and total basis.

So which is better conventional or FHA? Neither is better. They are equally great options based on your needs. Here’s a quick comparison:

Some may scare buyers away from FHA due to the higher monthly costs. But there’s something they are not telling you…

The FHA loan may even be a better option particularly if you have the $136,000 saved.

Don’t Miss Out on the Opportunity Costs  

Opportunity costs represent the potential benefits that an individual, investor, or business can miss out on when choosing one alternative over another.

Let’s go back to that Orange County home and take a look at a 3.5% down payment instead of the full $136,000.

At $680,000 the home will likely qualify for FHA funding as the FHA limit for Orange County is $970,800. And according to Redfin a 3.5% down payment ($23,800) would require a monthly payment of $5,186 per month.

Here’s the breakdown:

While with 20% down ($136,000) the monthly payment would be $4,157.

So in how in the world would paying $1,029 make sense?

Over the 30-year life of the loan (360 months) the FHA loan will cost about $1,886,960 while the conventional loan will cost $1,496. 520 a difference of $390,440.

Remember that opportunity cost? Here’s how to calculate it.

Let’s say instead of plunking the whole $136,000 down we went the FHA route. That would leave us with $112,200 in the bank. Now suppose we invested that money for the 30 years and got a 6% annual return.

Would we come out ahead?

Let’s run the numbers at FNCALCULATOR.COM > click on the Compound Interest Calculator. Input the $112,200 as the principal amount and 360 for the Period and 6.0 for annual interest rate and compounding annually. This would amount to a $644,419.71 at maturity.

This is not impossible, considering the average inflation adjusted return for the S&P 500 is 7.3% per year for nearly the last 30 years according to the Motley Fool.

That’s a potential lost opportunity cost of $253,979.71.

Again, FHA loans are backed by the government, so they’re one the easiest mortgages to qualify for. And, the entire down payment and closing costs can be covered with gift funds. Plus, most types of homes qualify, including single-family, condos, multi-unit properties, and manufactured homes.

Let Embrace Help You Find Your Dream Loan

At Embrace, we realize that every homebuyer is different. We’ll help you find the mortgage that fits your individual needs and goals. And whether it’s 20 percent conventional or FHA, we can guide you through every step of the process from application to closing.