You want to buy a house. Good for you. But you don’t have a lot of money to put down on it, and your credit history isn’t as stellar as you’d like it to be.
Well, the government still has a mortgage loan for you – it’s the FHA (Federal Housing Administration) loan. But there are a lot of misunderstandings about this loan.
The government has changed some of its rules recently with FHA loans making it more expensive for buyers to have and limiting its borrowing limits in some parts of the country, says Kirsten Fleenor, branch manager of Array Capital Investments in Dallas. Hence, more restrictions and more insurance costs were added. Here are FHA loan pros and cons:
Lower Down Payments
A standard FHA loan only requires that you bring in a 3.5 percent down, unlike five percent down payment requirement for conventional loans.
Lower Credit Scores are OK
Your credit score doesn’t haven’t to be high for an FHA loan. Some mortgage lenders out there will underwrite an FHA loan to someone with a 580 credit score, says Greg Iverson, senior loan officer at USA Mortgage in St. Louis.
“We are at a minimum of 600. A lot of conventional loans only accept 620 or above.” he says.
Mortgage Insurance Premium and Upfront Mortgage Insurance Payment
The government is backing the FHA loan, even though it doesn’t provide the loan.
But to protect the government, a Mortgage Insurance Premium (MIP) is charged each and every month of the FHA loan.
This FHA charge is almost double what people pay with traditional loans (called Private Mortgage Insurance or PMI) when the down payment is below 20 percent of the loan.
And the government decided just last year to make the MIP a continuous charge throughout the loan. There used to be a time when the payments would stop once you paid down the principal to 20 percent of the original loan. Not anymore.
More downside, an FHA loan also has an Upfront Mortgage Insurance Premium for the cost of insuring the loan.
“The cost of an FHA loan has gotten higher compared to a conventional loan,” says Fleenor.
“As a loan officer, you look for the best interest for a client. If they can go with a conventional loan, that is the route they should do instead of an FHA loan.”
Minimum Property Standards
You can’t get an FHA loan on just any home.
There are standards that must be met in order for your future home to qualify. Although these standards generally reflect a condition that most people might consider minimum for a home to be occupiable, the Devil is in the details. FHA appraisers are given guidelines, and it’s at their discretion whether or not something that’s harmless, like a barely leaking faucet or a non-working range hood, must be repaired before closing.
An FHA appraiser can ruin an otherwise great deal for everybody.
So, if the home you’ve got in mind is a fixer upper or needs some costly repairs right away (even if you’ve already budgeted for them), you should consider another type of loan.
Sometimes sellers will make repairs if you ask for them from the beginning of the deal, or at the point where they’re discovered in the home inspection, but you can’t count on that — especially if you’re already asking for seller paid closing costs.