The FHA loan is one of the most common types of loans on the market and this is because of a variety of reasons. This government secured loan can get many people into a home who would otherwise not have been able to experience home ownership.
Benefits Of FHA Loans
Take a look at some of the benefits of the FHA loan and then decide if it is for you.
Low Down Payment
This is one of the primary reasons that people choose the FHA loan. You can get into a home with as little as 3.5 percent down. That is a huge benefit for those who can not come up with the typical 20 percent down required for conventional financing.
A conventional loan on a 200,000 dollar home would require a 40,000 dollar down payment. With an FHA loan, that required down payment is reduced to just 7,000 dollars. That is 33,000 dollars less that a home buyer would have to come up with.
Choosing an FHA loan can mean the difference between buying a home or being forced to save for an additional two years, four years or even more.
Poor Credit Accepted
If your credit is below 640, conventional financing is not going to be an option for you. Most borrowers obtaining conventional financing have scores that are in excess of 700. If this is not you, an FHA loan may help you get into a home.
With an FHA, you can have scores as low as 580 and still get an approval. With enough of a down payment, generally 10 percent, you can even have scores lower than 580.
Short Waiting Period After Bankruptcy
If you have filed bankruptcy, an FHA loan can get you into home ownership much quicker than conventional financing.
For those who filed chapter 13 bankruptcy, the waiting period is just one year. Home buyers who filed chapter 7 will have to wait 2 years which is still far less than conventional financing.
Conventional loans require a 4 year waiting period after bankruptcy, regardless of the type.
Negatives Of FHA Loans
It is not all roses with the FHA loan, there are some big negatives to this loan type.
Mortgage insurance is a requirement with an FHA loan and unless you put 10 percent down, you will pay it for the life of the loan.
This insurance requirement can add hundreds of dollars to your monthly payment. That means that over the course of a 30 year loan, you could end up paying over 60,000 dollars in insurance.
The only way to get out of mortgage insurance with an FHA is to refinance the loan once you have achieved 20 percent equity. It no longer drops off automatically like it did in the good old days. That is, of course, unless you put over 10 percent down.
If you do put 10 percent or more down, mortgage insurance will drop off, but only after 11 years. You are very likely to have 20 percent equity long before that point.
Low Loan Cap
If you plan on buying a much nicer than average home, an FHA loan may bot be for you. Loan maximums are capped and the amount varies depending on where you intend to live.
The maximum loan value could be as little as 350,000 dollars if you live in a county with lower average home values. It could also be as high as 750,000 dollars but hat is for expensive areas such as San Francisco.
With an FHA loan, you can get a nice home but it will not be anything too extravagant. If that is what you are looking for, choose a different loan program.
Summing It All Up
An FHA loan can help you get into a home if you have limitations on money and credit, but it is not for everyone. The mortgage insurance that is required for most, if not all of the loan can put a huge hurt on a budget, so it is something that must be considered.
In addition, potential buyers should consider whether credit repair is the answer to get a more affordable home loan. With good credit and just 10 percent down, a buyer could avoid mortgage insurance with an 80-10-10 loan. Something that should be considered.