FHA HOME LOAN PITFALLS

FHA loans are quite popular simply because it makes it easy for most people to purchase a home. Home ownership is a reality for many people, but these types of loans are not for everyone. Ensure that you fit the right type of profile and that you understand the disadvantages of getting a FHA loan before you fall in love with getting one.

Highlights of a FHA loan

Even if you have limited funds for a down payment and have damaged credit, you can qualify to get a home loan with a decent interest rate.

Down Payments: a FHA loan will let you put as little as 3.5% down. This will allow you to purchase a more expensive home with less money, and you are able to reserve some funds for improvement projects or other types of goals.

Credit issues:Those who have a troubled credit history will often have a hard time of getting approved with a conventional lender. FHA backing will allow you to be approved with a low credit score.

Home Improvement: FHA 203k loans will let you fund home improvement projects and buy a house at the same time. Combined with other types of features, they also make it easy and inexpensive.

Drawbacks of using a FHA Loan

When you are looking to purchase a home, it is wise that you evaluate whether or not getting a FHA loan will help you. Look at the bigger picture and then consider all the financial goals.

Low Down Payment: Low down payments can be a red flag. Putting 3.5% down could indicate you are financially stable and a home loan may be a higher risk.

It is worth waiting until you can save up for a larger down payment or looking at a less expensive home? Remember, the more that you borrow, the more interest that you will pay, which will make your house more expensive.

Upfront Insurance: If you put less 20% down, it means that you will be required to pay for mortgage insurance, with FHA loans having 2 types of insurance that you will need to pay for the whole life of the loan.

There will also be an upfront charge of 1.75% and most borrowers tend to wrap this particular fee into the balance of the loan. Remember, the more that you borrow, the more interest that you will pay. You will pay more than 1.75% unless you write a check at closing. A larger loan will also mean that you will have a larger monthly payment.

Ongoing Insurance: You will also have to pay monthly mortgage insurance. Ongoing insurance premiums are between 0.80 and 1.05% of the loan balance, even though it can go as low as 0.45% if you have a 15 year FHA loan. This extra cost means that you will end up paying additional every month. Whereas, private mortgage insurance may be cancelled once you have over 20% equity within your home. However, FHA insurance is unable to be canceled unless loans were obtained prior to June of 2013. Basically, you will have to refinance or pay the loan off to eliminate that cost.

Loan Choice: You will have limited choices when getting a FHA loan. For many borrowers, there is a 15 year or 30 year fixed loan which is great, so there isn’t a problem. But, there are situations when an interest only mortgage or adjustable loan is much better. Don’t just use them to lower your payment, make sure you have a bigger plan.

Property Limitations: Getting a FHA loan approved means that the property meets certain standards. For instance, basic safety and health requirements are met. If you are looking for a fixer upper, a good bargain, or a foreclosure, the FHA loan won’t work. For the properties that are move in ready, a FHA loan will work. But if you are buying a condo it could be challenging. If there aren’t enough units in the building that are owner occupied or there are other issues, a FHA loan may not work.

Qualifying: FHA loans may not always get approved. You will still need a minimum credit score, and need documents that state you have plenty of income to repay the loan. For qualifying for the lowest possible downpayment, you’re going to need a 580 or higher on your FICO score. However, you may get approval with a score under 580 if you can provide a higher down payment.

Seller Hesitation: There are some situations that FHA loans could be a disadvantage when you are buying a home. Sellers want to know about their potential buyers, and a FHA loan doesn’t say strength. What is more is that the seller may fear that the extra requirements are going to slow down the deal. If you are purchasing in a hot market, then try a different financing form.