Deciding to buy a house is exciting and stressful. You get to see dream homes as well as ones that you wouldn’t buy in a million years. The research has been done and an FHA loan is absolutely for you!
Or is it?
Choosing an FHA loan is absolutely an option and it should be left on the table. However, if there are other choices for mortgages, considering those won’t hurt.
So, are FHA loans good? Are they your only option? What are the costs? These are just a few questions to ask yourself. We’re going to take a look at some of the finer points of these loans, give some details, and let you make the decision!
Keep reading for more!
Why FHA Loans Are Enticing
Federal Housing Administration (FHA) loans are given by approved lenders and backed by the FHA. Basically, if you don’t pay the mortgage, the lender doesn’t completely lose out.
These loans are available to people will lower credit ratings as well as people with small down payments. This means that scores as low as 500 and a down payment of 10% will allow you to be approved.
For people with better credit scores, a down payment of 3.5% is required.
Aside from the fact that FHA loans are more accessible to people, there are a couple other reasons they are so appealing:
- There are no penalties if you want to pay more toward your loan (known as prepayment)
- Down payments can be in the form of ‘gifts’ from friends and family
- In the event you want to sell your home, FHA loans can be assumed by the new buyer
- FHA loans allow the seller to pay up to 6% of closing costs. Typically sellers can only pay 3-4%.
Finding the Right Home
Finding a home that fits your requirements may be tough, but when applying for an FHA loan, it also must fit the Housing and Urban Development’s (HUD) list. The FHA loan application rolls this necessity into the process during the appraisal.
To give you an idea, this list of requirements includes stipulations for mobile homes, condominiums, precut or modular homes, and several others. For manufactured homes, it must have been built after June 1976 and not be on wheels.
In regards to rural developments, the FHA will only approve 10 acres, and a homestead must be located on some portion of it. Depending on where you live, there also are limits on how much of a loan the FHA will insure.
Although these requirements may sound fairly easy to meet, they can present more of a challenge than initially thought. It is not impossible to find a HUD-approved home, but it may not be exactly what you wanted.
The best way to find a home that you love and meets these requirements is to work with a professional. Real estate agents can show you listings that meet your expectations while still falling within the prerequisites of HUD.
Other Considerations Regarding FHA Loans
FHA loans may be attractive to buyers challenged by credit requirements or with little savings for a down payment. However, they truly offer few benefits to people who would qualify for other types of loans.
When you decide to take a loan that is backed by the FHA, it must be done through an approved lender. This means you are limited to only a few options when searching for the best interest rate possible.
FHA loans, like traditional home loans, require insurance premiums. Traditional home loans require the mortgage insurance be paid monthly as part of the note. The insurance can be dropped after a certain amount of equity is reached.
Loans that are backed by the FHA require an upfront premium of 1.75% as well as an annual premium that is divided by 12 and paid monthly. The upfront premium can be paid at the time of the loan or monthly as well.
Unlike a traditional mortgage, this insurance cannot be dropped. It will be paid over the life of the loan regardless of equity.
Lesser Known Benefits
Paying mortgage insurance over the life of the loan can add up, especially if you remain in the home over the 15 to 30 years. However, there are a couple other benefits of taking on an FHA loan.
A huge benefit to these loans is the fact you can borrow cash for home repairs. The amount of the loan is based entirely on the value of the home after the repairs.
Also, financial help is available if you are unable to make payments. Financial hardships happen, so can the unexpected. If it does, there are ways to apply for a lowering of the interest rate, extending the payment period, or deferring part of the loan.
Different Options for Different People
The truth is, only you will know what is the correct option for your situation and home buying needs. The FHA loan application is quite similar to conventional loans yet allows for people with less than perfect credit to be given a chance at homeownership.
Nothing is free, though. Because of the fact, borrowers may go into the loan with less than perfect credit, those extra fees (like insurance) can add up quickly.
The interest rates truly depend on how much of a downpayment is available to you as well as what your credit score and job history look like. If you are eligible for both types of loans, be sure to consult with a neutral third party about your best option.
If you’ve foreclosed on a home or declared bankruptcy in the past 5 or 10 years, an FHA loan may be the only option. Just remember the ‘only option’ doesn’t mean a bad option. It still allows you to become a homeowner again which means saving on rent.
Are FHA Loans Good?
All of this information still begs the question, “Are FHA loans good?”
FHA loans are beneficial to those who need them. Like everything else in the world, they have their pros and their cons. They won’t work for everyone, but they’ll work for some.
It’s important not to skip over these loans just because you qualify for a conventional one but also don’t walk away from them due to the fear of long-term costs.
Only you will know what type of loan will be appropriate for you. Best of luck in your new home!
If you’d like more advice for homebuyers, check out our blog!