Is an FHA Mortgage Right for You?

FHA mortgages are not for everyone, but they are the best mortgages for many people. Ask yourself these questions to find out if an FHA loan is right for you.

Am I buying or refinancing a low- to moderate-priced home? FHA home loans were not created to help millionaires buy mansions. Loan sizes are limited, and these limits are based on median home prices in your area. Check FHA loan limits for your area before applying for an FHA mortgage.

Can I document my income? FHA mortgages are fully-documented mortgages, which mean you’ll have to supply proof of income with your application.

Is the home I want to buy or refinance my primary residence? FHA mortgages cannot be used to buy rental property or a vacation home. You can, however, rent out the other units of a duplex, triplex, or four-plex as long as you live in one unit. You can also use an FHA mortgage to buy a home for a close friend or relative.

Will I be putting less than 20 percent down on a home purchase, or refinancing with less than 20 percent home equity? Conventional (non-government) home loans exceeding 80 percent of your home’s value come with private mortgage insurance (MI), which you must qualify and pay for. This can be hard to do unless you have excellent credit, and may be more expensive than the mortgage insurance premiums (MIP) that come with FHA home loans.

Does the home I’m buying or refinancing need some work? FHA 203(k) mortgages allow you to wrap the cost of certain home improvements into your purchase or refinance mortgage, even if you have little or no home equity.

Would I like to refinance and take cash out? With enough home equity, you can refinance and take cash out using FHA or conventional refinancing. However, FHA does not charge you extra for this privilege the way conventional lenders do, and FHA allows cash-out refinancing to 85 percent loan-to-value.

Do I expect mortgage rates to have increased by the time I sell my home? FHA mortgages are assumable under certain conditions, which mean that someone who buys your home might be able to take over your loan. If your rate is lower than what’s available when you sell, this assumability can make your home more desirable.

Do I need a little extra help qualifying for my mortgage? FHA underwriting guidelines are more flexible than those of most conventional mortgage lenders. For example, if you filed for Chapter 7 bankruptcy protection, you’ll need to wait at least four years to qualify for a conventional Fannie Mae or Freddie Mac loan. You’d be eligible for FHA financing in only two years, and possibly even sooner if you could prove that the bankruptcy was beyond your control.

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