If you’re in the market for a home or looking to refinance, you might want to check into an FHA home loan. In fact, as I’ve noted, access to FHA loans is a cornerstone of the housing rescue bill that was recently signed into law. With that as a backdrop, I thought I’d take a closer look at this sort of mortgage.
What is an FHA home loan?
FHA loans are mortgages that are insured by the Federal Housing Administration. The FHA doesn’t actually make loans; rather, they insure loans issued by federally qualified lenders. These loans are only made to individuals and non-profit/government agencies that are approved to participate in U.S. Department of Housing and Urban Development (HUD) programs (more on qualifying, below).
Advantages of an FHA vs. conventional home loans
FHA home loans have a number of advantages over conventional home loans. These include a lower required downpayment, competitive interest rates, lower closing costs that can be included in the amount of the loan, the ability to include re-modeling/repair costs in the amount of the loan, no pre-payment penalty, and possible leniency during hard financial times, which may translate into a reduced risk of foreclosure.
You can also often qualify for an FHA loan even if you’ve had relatively recent financial problems. For example, you may be able to obtain an FHA loan within 2-3 years of bankruptcy or foreclosure as long of you’ve maintained good credit in the mean time. It’s also easier to use gifts to cover your downpayment and/or closing costs when using an FHA loan product.
Disadvantages of an FHA vs. conventional home loan
Despite the foregoing advantages of FHA loans, there are also some drawbacks of this type of mortgage. For example, an FHA loan might not be large enough to cover the cost of the home your are interested in buying. While the FHA periodically increases their limits, these sorts of limits are a big part of the reason that FHA loans lost favor starting in the 1990s – as home prices began shooting up, more and more properties were ineligible for an FHA loan. If you’re curious about FHA loan limits in your area, check out this calculator.
Another potential disadvantage of FHA home loans is that they don’t come in as many flavors as conventional loans. Rather, they’re designed specifically to serve the needs of long-term homeowners, and thus tend to have relatively conservative terms. In addition, while you might end up paying private mortgage insurance (PMI) on a standard home loan, the insurance premiums associated with an FHA home loan are built into the loan, such that you may end up paying more for your mortgage insurance over the life of the loan.
Qualifying for an FHA home loan
While anyone can apply for an FHA home loan, they are most frequently used by first-time homebuyers. To apply, you must have a valid social security number and be a legal U.S. resident. The FHA’s mortgage programs do not typically have income limits, though you must have sufficient income to qualify for the mortgage payment alongside any other debts that you might have. Likewise, the FHA doesn’t have minimum credit score requirements, though past credit performance will likely be used in determining eligibility.
For more information about FHA Loans check out the FHA experts blog at FHALoanPros.com