If you are serious about buying a home, you might have come across the option to finance a home with an FHA mortgage loan. If you have less than stellar credit and a small down payment, an FHA loan may seem like a dream come true for you to buy a home. FHA mortgages enable you to buy a home with less money down, so it's very appealing to those who don't want to wait to save up a large down payment. However, before you consider getting one, consider these points.
You Will Have to Pay Mortgage Insurance
One of the biggest cons in having an FHA loan is that you will pay a monthly insurance premium. Before 2013, you would pay this premium until 78% of your loan had been repaid. Now, most homeowners will be required to pay the premium during the entire life of the loan until they pay it off or until they refinance their loan under a traditional mortgage. Additionally, "FHA financing now requires a 1.75 percent up-front mortgage insurance premium." Many people who are anxious to get into a home they own quickly overlook these fees and costs, but they can seriously add up.
Higher Property Standards
If you had dreams of fixing up an old house and making a significant profit when you sell it, an FHA loan is not for you. In fact, it is much harder to get a fixer upper with an FHA loan. The U.S. Department of Housing and Urban Development (or HUD) has specific requirements for homes bought with an FHA loan. Even something as simple as leaking pipes could mean that you aren't approved to buy that home. Essentially, you have a lot more loan restrictions when it comes to FHA loans. You can't buy whatever house you want just because you see its potential.
There Are Loan Limits
If you live in an area with expensive homes, it may be harder to find a home within your FHA loan budget. FHA loans cannot exceed a certain amount, and in cities like New York or San Francisco, you will have to search a little harder to find a home that meets the guidelines. The truth is, if you don't have great credit and you don't have a large down payment, then perhaps an expensive home purchase isn't the best idea. However, as previously mentioned, in some areas can be difficult to find reasonably priced homes.
With a traditional mortgage, the only paperwork that you will fill out are those through your bank and the mortgage lender through whom you want to purchase. With an FHA loan, you are required to also fill out paperwork for the government. While not overly complicated, this can be a hassle for people who value their time or really want their mortgage paperwork to go through quickly. FHA paperwork takes patience and it's important to review it thoroughly.
It Costs More Than Conventional Loans
Although you are only required to put down a minimum 3.5% down payment on a home, with insurance fees and a longer loan term, you may be paying more for your home in the long run. The best way to see if you are getting a good deal on the FHA loan is to compare it to the conventional loans that banks may be offering.
Ultimately, while an FHA loan can be a great option for those who want to own a home but don't meet all the traditional requirements, there could be better options out there. Doing your research can help you decide if taking the FHA loan route is best for you.