FHA Loans: Are They Right for You?

With restrictions relaxed for FHA loans, they can be enticing, but look out for their hidden thorns that can cost you over the long run. If you were told there’s a loan out there that is designed to make it easier for you to qualify for financing for your home, you’d probably say, “where do I sign?”

FHA loans were created in the 1930’s by the Federal Housing Administration. What makes them unique is they offer borrowers a better deal than the traditional home loans. They are a better deal because these loans are mortgages insured by the FHA. Before you sign your name (life) away, let’s examine these loans closely and see if they are right for you or not. We’ll see how they work, and the pros and cons that come with it.

Advantages of the FHA loan

FHA loans, simply put, make home ownership more attainable. You are allowed to qualify with a down payment of just 3.5%. Credit scores are also allowed to be low with still reasonable interest rates. Another thing you can do is use gifted money for your down payment. These FHA loans also usually carry a higher debt-to-income ratio than most lenders will accept.

This is enticing because it first-time home buyers and young people who do not have 20% of a down payment, and/or may have less than desirable credit scores.

How FHA loans work

Just like every good deal out there, there’s a catch. Since these loans are insured by the FHA, if the borrower defaults on his loan, the FHA is obligated to pay the bank. A good note to consider is the premiums are quite high so the FHA loan can become rather expensive.

Because the FHA has the monetary obligation (worst-case scenario) the rules are a bit more relaxed than with other type loans. The lenders aren’t the ones at risk, but the government is, and they feel it’s the nice thing to do. What does the government know? They know how to hand free stuff out, that’s for sure!

Disadvantages

FHA loans can be littered heavily with fees. They may seem like a great deal on the outside, but once the insurance fees start popping up, it can add up quickly. With most other loans, the borrower could have the insurance removed after five years, but with FHA loans, it’s with you for the life of the loan. Basically the insurance is permanent with this type of loan

Is it right for you or not

When you apply for an FHA loan, you won’t have to worry about high credit scores, 20% down payment, and low debt-to-income ratio. If you have less than 5% of a down payment, this is probably your best bet.

These also work well in a buyer’s market because the seller is allowed to pay up to 6% of the closing costs, unlike 3% for the traditional way.Before you sign your name away remember the pitfalls of FHA loans and make a logical decision if this is the one for you. Typically private mortgage insurance is less expensive in the long run than the insurance you’ll get for your FHA.

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