If you are on the market for a home, and have been looking for financing, you’ve probably heard about FHA loans before. FHA loans are often said to be the best option for first home buyers, but is it true? While FHA loans have many advantages that shouldn’t be overlooked, it’s important to understand how they work before you seek one. In this article, we’re going to explain what FHA loans are and give you some of their pros and cons.
What is an FHA Loan?
FHA loans are issued by the Federal Housing Administration. Please note that the FHA does not issue the loans themselves, they simply offer insurance in case the debtor forfeits. As a borrower, you will have to get a mortgage from one of the lenders that is approved by the FHA.
The Federal Housing Administration was created in the early 1930’s and is currently the single biggest mortgage insurer in the US. What separates the FHA from other governmental organizations is that it is completely self funded and doesn’t rely on taxpayer funds. In addition, fha loans do not only cover single family homes, but multiple family homes and even health care facilities in some cases.
What are Some of the Pros of FHA Loans?
FHA loans offer a variety of great advantages to those seeking mortgage loans. Here are a few of them:
Small down payment: One of the biggest advantages of FHA loans is that they do not require that you put a down a huge initial payment upfront. This is especially great for families on a tight budget, or those with a decent credit score who just happen to not have enough liquidities to afford a down payment.
The initial down payment can be as low as 3.5% in some cases, which is much less than usual. In most cases, people will be asked to put as much as 20% upfront before they can strike a mortgage.
No minimum credit score requirement: Another great aspect of FHA loans is that there is no minimum credit score requirement to qualify for one. However, lenders will still have to accept liability for any applicant with a credit score under 620. In the case someone doesn’t have a credit history, lenders will use other means to check the borrowers viability by looking at things such as payment history for instance. Those who have a blemish on a record, such as a short sale, can also apply for a new refinance plan under certain conditions. FHA refinancing after a short sale is possible as long as the borrower was current on their previous mortgage at the time of the sale.
Flexibility: If an FHA loan is assumable, a buyer can take over the loan in the case of a sale. This means that they will be able to pick up the loan and get the same rate you were getting on the house. In addition, FHA loans make it easier for people to use gift money for closing costs and down payments.
What are the Cons of FHA Loans?
While FHA loans are a great option for many first time homeowners, they are not perfect. Here are some of the drawbacks of FHA loans:
You may not have access to large sums of cash: One of the issues with FHA loans is that the amount you can get through one is limited. So, it may limit your options when choosing a home. In addition, you may have to pay insurance on the loan.
More house regulations: In order to access an FHA loan, the house you have your sights on has to meet more requirements. For instance, the home will have to pass some standard health and safety requirements. For this reason, you may not be able to get a loan on a home you wish to refurbish and sell for a profit.
You will be limited to a fixed rate mortgage: Another issue with FHA loans is that they are limited to fixed rate loans. While for many people, going for a fixed rate may be the better option, especially when interest rates are low, in some cases, going for an interest only loan, or one with an adjustable rate, might be better.
Conclusion
In most cases, FHA loans are a great deal for first time home buyers who are strapped for cash or don’t have the means for a huge down payment. It is also a very flexible option that allows sellers to pass on the mortgage to any buyer who wishes to buy their house. However, they do have their limitations and aren’t for everyone. Before you decide to get one, make sure that you are well educated on the different types of FHA loans so you can make a wise decision.
