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First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 11:57 am
by Cuatro
My wife and I are considering buying our first home. We have more than enough tax-exposed stocks and ETFs to make the down payment on a regular loan (with >$40,000 in stocks and ETFs left over); all stock and ETF sales would result in long-term capital gains. Should we sell stocks and ETFs to make the down payment, or should we take advantage of an FHA loan, with say 10% down, and pay the mortgage insurance that the FHA loan would incur? Our FICO score is >800.

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 1:27 pm
by LongRoad
A definitive answer probably would require more specific numbers, but I'd be very reluctant to pay the 1.75% up front plus 0.45-0.80%/yr MIP for FHA if you can qualify for a 20% down conventional mortgage.

While some here might appreciate the additional leverage offered by the 10% down FHA loan, it's incrementally very expensive leverage.

The capital gains tax might seem painful in the short term, but will need to be paid eventually. OTOH, if you can know your capital gains tax rate will decrease in the future, this may be something to consider.

One other point -- an offer with a conventional mortgage might be viewed more favorably by sellers. In my (limited) experience, FHA loans take longer to close than conventional.

Best of luck! :beer

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 1:27 pm
by MotoTrojan
Cuatro wrote:
Thu Mar 14, 2019 11:57 am
My wife and I are considering buying our first home. We have more than enough tax-exposed stocks and ETFs to make the down payment on a regular loan (with >$40,000 in stocks and ETFs left over); all stock and ETF sales would result in long-term capital gains. Should we sell stocks and ETFs to make the down payment, or should we take advantage of an FHA loan, with say 10% down, and pay the mortgage insurance that the FHA loan would incur? Our FICO score is >800.
I would setup a simple spreadsheet and see what happens if the market is flat, goes down, or goes up. Nobody knows what will happen so we can’t really answer.

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 1:40 pm
by fittan
First of all, if you're saving for a down payment, you should have a separate "bucket" of savings held in risk free account (e.g. CD, treasuries). If you're banking on your stocks and ETF, you're putting yourself in too much risk (i.e. gambling). In short, stocks and ETF can be "fun" money, NOT down payment money.

Second, $40K is probably less than 20% (unless you're looking at a $200K house). If so, you should save up to 20% before buying. I never liked FHA loan. You have to pay 1.75% of loan amount upfront and then 0.85% on going forward.

In a nutshell, just save up 20% and avoid the hassle of mortgage insurance (i.e. PMI).

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 2:04 pm
by Nate79
FHA loan would be the last option I would consider and PMI should be avoided as well. I would save for a down payment or sell stocks to have enough to avoid both of these.

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 2:20 pm
by bloom2708
Agree to avoid FHA.

Save up more than 20%. Closing costs, partial years taxes, moving, extra furniture, updates done when/while you move in. Also, avoid PMI.

There are numerous threads asking how to get rid of PMI for those that put less than 20% down. The honeymoon ends very quickly with PMI.

Good luck!

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 2:43 pm
by whodidntante
Withdraw the cash from your margin account, preferably with a broker with much lower rates than Vanguard. Margin loans do not have a fixed repayment schedule, or even a repayment schedule at all, so long as you maintain maintenance margin. But you can pay it off as you like.

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 4:24 pm
by baseball2horse
For what its worth I paid for my down payment using stocks that I sold and I currently get to pay the long-term capital gains on with my upcoming tax bill.

And my logic is that while it is a relatively painful taxbill, I was always going to pay those taxes eventually. And now that money gets to grow tax free up to 250k in my house (while i am well aware that it may not an increase at all I am in a rapidly growing area so it was something i considered). It also allowed me to keep my monthly payments reasonable and avoid PMI or any other fees. And my preference was to pay tax that I was always going to owe now and not pay PMI vs paying PMI and paying the tax later.

I am in 15% LTG bracket which is so large that I don't anticipate ever being in a different one and I live in a flat rate tax state so I figured I'd pay the same amount of tax regardless of when I sold.

Another consideration is what your plan is with the monthly difference between monthly payment FHA loan and conventional. If its simply going to replenish your stock account, it maybe doesn't matter so much, but if having a smaller payment would allow you to max say a 401k account that you aren't currently maxing that would be something to consider also

Re: First time home buyer. Should we sell stocks for down payment on regular loan or get an FHA loan?

Posted: Thu Mar 14, 2019 5:50 pm
by Dale_G
Another factor to consider:

If there is any doubt by the seller as to the appraised value of the home, he/she will likely choose an offer for cash or a larger down payment.

In a recent sale by a relative, we totally ignored higher offers with low down payments. Too bad for folks without an "adequate" down payment, but the seller wanted assurances that the sale would be completed in a timely fashion.

Dale