Pros and Cons of FHA Loans
Home ownership is the American dream, and now is a great time to capitalize. Unfortunately, many consumers have difficulty getting approved under recently tightened lending restrictions. For that reason, government-backed home loans have enjoyed renewed popularity lately. The Federal Housing Administration (FHA), in particular, heavily promotes home ownership and has broad appeal. The program has its pros and cons, however, and may not be for everyone.
-Unlike VA loans, which are government-backed loans for military veterans, practically everyone can use FHA loans. There is also no income limit, so the loans may be applicable across the economic spectrum.
-There is no prepayment penalty. You may not be planning to pay your home off early, but you may need to refinance when interest rates drop or when your credit score improves and you are eligible for better deals.
-In some cases, FHA loans can be assumed by the next homeowner. This can make it easier for you to sell your home, provided the buyer qualifies with your mortgage lender.
-May be easier to use gifts for downpayment. This is a nice feature if Aunt Sally wants to help you out.
-The FHA may be more likely to work with you during hard financial times, as opposed to a private lender, who only has the financial bottom line in mind.
-FHA loans require a small down payment, though only around 3%. It can be tough to find such small downpayment requirements with other lenders.
-FHA loans also require a fair credit record and a decent debt to income ratio. This ratio lets lenders know how much debt you have in relation to your income. It clues lenders in as to whether you could handle the additional cost of a mortgage payment and home maintenance, taxes, insurance, etc. Ideally, your debt to income ratio should be under 29/41.
-There will be limits on the value of the home you can buy. For that reason, this type of loan may not be appropriate for wealthier home buyers seeking larger, more expensive homes. Those buyers may want to consider FHA, however, if seeking low- to mid-range properties for renting out.
-FHA loans will require mortgage insurance payments each month. This collected money helps pay off your loan in the event that you default. If you never default on the loan, but instead pay off the entire loan over time, then your mortgage insurance money is simply thrown away. Additionally, FHA loans will require a 1.5% mortgage insurance premium up front.
As always, if you are looking at FHA loans, you should look elsewhere also. Particulary if you have good credit, you may be able to find a comparable or even better deal elsewhere. Be sure to compare interest rates and terms and conditions. This is likely the biggest purchase you'll ever make, so don't rush it.