Why FHA Loans are Bad for First Time Homebuyers

by Erika Torres

Couple moving into new houseLast week, Eric and I stopped by to look at a three-bedroom townhome for sale in our neighborhood.

We were just looking, since we decided not to buy a house, remember?

Eric had actually seen this home online, and I was less than in love with the online photos as they left a lot to be desired. But I agreed to take a look.

And of course, we both fell in love with it.

Our Checklist for Our First Home

It just seemed to have a lot of what we’re looking for in a first home:

  • Quaint and manageable
  • Nice outdoor living space
  • Three bedrooms, 2.5 bath in our desired neighborhood
  • Within our price range
  • A fixer-upper that’s in good condition (read: you can upgrade after you move in, not before)
  • Potential to be a rental property in the future

I think you can kind of guess which amenities are my requirements and which ones are Eric’s.

We tried not to get too excited, but how do you not when you start thinking of all the possibilities that you might become a homeowner?

Eric started making a list of the house projects he could work on, and I started crunching numbers to see how this would impact our budget.

And then we got the financial numbers.

What PMI Costs on an FHA Loan

What we originally thought would be a $2700 mortgage (remember we live in southern California), turned into an almost $3500 mortgage.

Here were the numbers:

Sale Price: $477,000
5% Down Payment: $23,850
Loan Amount: $453,150
Principal & Interest 4.25% 30-year fixed: $2229.21
Tax: $507.29
FHA: $443.37
Home Owners Association: $299

Total: $3478.5

I was shocked to see that PMI (Private Mortgage Insurance) on the FHA loan, which is for first-time homebuyers who can’t put down 20%, was $445.

That’s like a car payment for a really nice car!

Why FHA Loan is Bad for Us

I thought that FHA was a stepping stone for first time homebuyers who can’t save up $100k to meet the 20% down payment requirement on most loans.

But apparently, you’re better off waiting until you have a 20% down payment.

Otherwise, you’re throwing $445 a month toward nothing.

Are FHA loans bad for all first time homebuyers? Probably not.

I know that this isn’t the case in most of the United States where you can actually buy affordable homes. Perhaps PMI is a lot more reasonable on a smaller loan?

Which makes me wonder—how do people our age afford homes in a competitive market?

I feel like first-time homebuyers our age who are buying in an expensive area like ours are either getting help from their parents, never had student loans, or are drowning in house-poor debt.

All of which are perfectly okay, I’m just a tad bit jealous.

It wasn’t a huge blow to see that we couldn’t even afford a home that we thought was in our budget. If anything, it reinforces our decision to just keep saving up.

At the rate we’re going, we’ll most likely have that $100k down payment in another three or four years. And we’re perfectly happy where we’re living now.

Stupid house, I didn’t want to buy you anyway.


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contact@littlehouseinthevalley.com July 30, 2014 - 10:26 am

Yikes! This is scary. We’re also looking to buy a house in SoCal and now I’m wondering if I’ve been under-estimating our affordability. I’d like to stay under $410K, but if an FHA adds on an additional monthly payment on top of PMI, perhaps I’m way off in terms of what I can afford. Have you looked into taking out an additional loan instead of PMI? Are some banks still doing this?

Nichole July 26, 2014 - 2:14 pm

I can totally relate to this post. We just closed on our first home in June. We were approved for a FHA and a 5/5 ARM. I initially was so against the adjustable rate…isn’t that what caused a huge bubble to pop in 2008?! People financing homes they couldn’t afford? My husband and I both work full time, and he is in law school at night. The house we ended up falling in love with was $50,000 less than our budget! The FHA with PMI and the interest was $300 more than the ARMS/month. Since we found a home under budget, we did end up with the ARMS in the end…it was lower interest, we only needed 5% and they did not require PMI. We were extremely lucky since I know this isn’t everyone’s case. Before my husband broke down the pros of the arm, I was legit thinking we just weren’t buying because I didn’t want to be house poor. But we hope of course post law school, husband will make more to cover the raise in APR. Plus our rate can only go up every 5 years. By then, we can either re-finance or sell…but the rate can’t go passed a certain fixed adj rate, Again, we were extremely lucky!

Sally July 24, 2014 - 2:54 pm

Well, it’s really freaking tough! I’m impressed that the HOA in your ‘hood is only $299, I would have pegged it higher in Irvine. We bought south of Irvine and got a Homepath loan. This means you can do 5% down but not pay PMI, however, the Homepath loan has a premium from where the market interest rate is at: in our case, about 0.6% more than what we would be paying if we had the 20% down. We did it though, because the FHA loan works out be something like 1.3% premium on the interest rate, and our place was a foreclosure priced about ~15K lower than any other unit. Perhaps we will refinance or maybe not. Our HOA is $335 (this is the real SOB in my mind). But our neighborhood is awesome, I love our condo and we’re doing biweekly payments on the mortgage (incl. taxes and insurance). While I wanted to have a 20% down payment, and eventully want a house with a yard, I am glad we have made this first property move. But hey, we’re only 3 months in!

Mrs. Ripples July 24, 2014 - 11:12 am

We never had to pay PMI and we put no money down. At the time our bank had a special program that if we took a new home owners class we didn’t need PMI. It was a special type of loan though that our bank held and didn’t resell. Our original interest rate was 6.7%. Then when we refinanced last year I asked about PMI and was told that since we didn’t have PMI on the original loan we wouldn’t have to pay it on the new one. Our interest rate is now 4%.

debtandthegirl@yahoo.com July 21, 2014 - 10:27 am

PMI is the devil for sure. It exists only to make the banks happy and you are the one holding the bag. I hope you are able to find something good for an affordable price. I hear California is pretty crazy for prices. Thats one of the few things that is good about Georgia–not very crazy interns of real estate.

Debt and the Girl July 21, 2014 - 10:28 am

Oops, I don’t know why it posted as “interns.” I meant to say the prices here are not as crazy.

Cece @Pink Sunshine July 21, 2014 - 8:26 am

I guess it’s kind of hard to pull yourself out of even “just browsing” when it’s something that deep down you really want. PMI is a very tough pill to swallow. You are already paying so much in taxes and towards interest every month it’s hard to throw in even more money on top of that especially one that feels like it’s for nothing. I guess it’s based on the purchase price so yeah-it’s a lot of you are in a high cost area. I wasn’t certain that FHA loans still required PMI but this clears it up for me. It’s like, thanks for not letting us have to put down 20% but that break doesn’t come free.

kimarally@gmail.com July 21, 2014 - 6:53 am

We bought our house a little over 2 years ago and pay about $180 in PMI every month. I periodically check RedFin to see what houses in our neighborhood are selling for and was SHOCKED last month when I saw they are selling for almost $80k more than we paid. I contacted our bank and they sent me paperwork for getting a new appraisal and what we would need it to appraise for to get our PMI dropped. It’s on the higher side of what houses sold for last month, but I think by the end of summer we may be able to get an appraisal to match our needs and can drop the PMI after only two years. If we can’t get the appraisal quite to where we need it to be, we may throw some cash at the principal to meet in the middle.

retiredby40blog@gmail.com July 21, 2014 - 6:20 am

Yeah, in your case PMI was definitely bad. But, in our case it was awesome! We bought a house for $40,000 and did and FHA loan with 3.5% down (our PMI was only $39.95 per month). It was a HUD home, so we were forced to use the HUD appraisal of $40K for loan purposes. But then, 90 days after closing, we had another appraisal done, which put the home’s value at roughly $125,000, so we were able to get the PMI dropped. Doing this freed up money for renovations, and allowed us to not pay PMI

Mysti July 21, 2014 - 5:23 am

We have an FHA loan, and all I can say is DON’T DO IT. We did a refi in 2011, and if I had the knowledge that I have now…there is no way I would have done it. The PMI is miserable. You are locked in for a minimum of 5 years, and as I am finding out, really the only way out of it is a refi. We have owned our house for almost 13 years….never have been late EVER on our mortgage. And we pay $133 a month just in case we decide to all of a sudden flake.

Keep saving….you can do it….and you will be so much happier in the end.

Jordann July 21, 2014 - 5:13 am

I feel your pain! Whenever I look at houses that I would want in my ideal neighbourhood, even the modest ones seem very out of my price range once I factor in all of the costs. Then I just resign myself to saving up a huge down payment.

plantingourpennies@gmail.com July 21, 2014 - 4:17 am

PMI has definitely gotten more expensive both with rates and now that you need to completely refinance into a different loan in order to remove your PMI premiums (even after you’ve reached 20% equity in your house). All in all, I think it’d be tough to find a place where taking a FHA loan with PMI really makes good financial sense.


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