FHA loans can be a great option for homebuyers when it comes to securing a mortgage. With a minimum of 3.5% down payment and looser restrictions than conventional loans on credit history, an FHA can be just what first-time homebuyers (or any home buyer) need to break into the real estate market.
It’s important to know all the facts about FHA loans before you make the decision so here are 5 things you may not know about FHA loans.
1. Not all properties are available for purchase with an FHA loan.
First of all, properties purchased with FHA loans must be used as the borrower’s primary residence; the loan cannot be used for investment or rental properties. Furthermore detached and semi-detached houses, town houses, row houses and condos with FHA approved projects are eligible for FHA financing.
This can be a problem for some first-time buyers whose budget may only be enough for a condo but the condo they fall in love with may not be FHA approved. Be aware that if you choose FHA for your financing, you have a smaller pool of available housing. Search through the FHA approved list of properties before you jump online and start falling in love with homes.
2. If you had a foreclosure, an FHA loan is a quickest way to get you back into a new home.
If you defaulted on your mortgage and went through a foreclosure or short sale with the bank then it will be some time before you can apply for a conventional loan backed by Fannie Mae or Freddie Mac. It depends on the Loan-to-Value ratio of the loan but usually you have to wait a full 7 years before you can qualify for a conventional loan. However, you can qualify for an FHA loan just 3 years after a foreclosure or 2 years if you go with a VA loan.
3. You will have to pay monthly mortgage insurance.
The price borrowers must pay for the benefits of securing an FHA loan with a low down payment and looser restrictions, is monthly mortgage insurance or MMI. Your MMI costs 1.35% of the loan amount on an annual basis so you can figure out your monthly cost by multiplying your loan amount by 1.35 and dividing by 12. Conventional loans with down payments less than 20% have their own private mortgage insurance but it is generally much less. FHA charges MMI because they’re taking a risk lending you the money for your mortgage because you’re not a strong borrower.
Whether it’s because you have less than perfect credit or you don’t have much money right now, you are a greater risk for default than the average borrower who is putting down 20% with a conventional loan and the MMI helps protect your lender if you do default on your mortgage.
4. You can get a discount for taking classes.
The FHA announced last month the Homeowners Armed with Knowledge or HAWK program, aimed at helping homebuyers bring down their mortgage insurance premium costs by attending counseling classes on homeownership. Buyers receive a discount on their monthly mortgage insurance for educating themselves, presumably reducing the likelihood they will default on their mortgage and risk for FHA. Plus if homeowners have 2 years of no delinquent payments they are eligible for another discount. If you take the classes you can save on average $325 annually and nearly $10,000 over the entire term of your FHA loan.
5. A Conventional Loan can be just as affordable.
Some conventional loans have a 5% down option, which means you can secure a loan that has a lot of the benefits of an FHA with the hassle and added costs that come along with this government loan. Check out the post we did on an FHA vs. Conventional loan scenario to help you figure out which one is best for your situation. Just be sure you look at all of the facts, do your research and most importantly consult with an expert before you decide. The choice is yours, just make sure it’s fully informed.
The best way to get all of your questions about FHA and other mortgage loans answered is by talking with a First Team agent to help you make a financial plan and set up a buying strategy.
