Federal Housing Administration loans look like a godsend right now. The FHA requires a down payment of only 3.5%, and it just lowered its mortgage insurance premiums by 0.5%. (You have to get mortgage insurance when your down payment is less than 20%.) It’s doing all this to attract more home buyers—especially first-timers—to the market.
Before you hop on the government loan bandwagon, know this: FHA loans aren’t for everyone. There are several things you should consider before applying for one.
Limited loan amounts and types
FHA loans can be quite modest. In most areas, the limit is $417,000. In certain high-cost areas, the limit is $625,000. Depending on where you live, that might not get you the spacious house you’ve been dreaming about.
Credit requirements
To take advantage of the FHA’s low 3.5% down payment, you’ll need a credit score of at least 580. The official minimum for an FHA loan is 500, although borrowers with a score below 580 will need to fork over a 10% down payment.
While you’ll have an easier time getting an FHA loan with a low credit score, it usually means higher interest rates. But since the FHA backs these loans, you’ll get better rates with a poor score than you would with a conventional mortgage. However, it’s often just better to wait and boost your score instead of paying thousands more over the life of the loan.
Some lenders won’t lend to those with scores below a certain threshold, like 620. Others might change their requirements to adhere to a changing market, which is what Wells Fargo recently did when it lowered its FHA credit requirements from 640 to 600.
A life sentence of mortgage insurance
FHA borrowers are required to pay an upfront mortgage insurance premium (MIP). Currently, the fee is 1.75%. This fee is usually rolled into the total cost of the mortgage.
Additionally, FHA borrowers have to pay annual mortgage insurance. For most loans, this mortgage insurance remains throughout the life of the loan—you will need to refinance out of an FHA loan to get rid of it. In contrast, you can stop paying mortgage insurance on conventional loans after acquiring 20% equity. In January 2015, the FHA reduced its annual MIP rates to 0.85%.
Remember: The MIP rate you get at the time of your loan is the one you’re stuck with unless you refinance. If you had closed on a mortgage in December 2014 with MIP rates at 1.35%, your premiums would stay the same in January 2015 despite the reduction.
Fewer lenders
While many lenders are FHA-approved, not all are. This means you may have a smaller selection when it comes to finding an FHA-approved lender in your area. However, you should not have too difficult a time finding at least two to compare.
Stricter appraisal requirements
FHA appraisal guidelines are more rigid than those for conventional loans, and not all houses will get the green light for FHA approval. Usually this means the home needs some kind of repairs. If the seller isn’t willing to make them, then there’s no FHA loan for that property in your future.
Don’t limit your choice
If your credit is good and your payment history is solid, you should first look into a nongovernment-backed loan, if only for comparison. Many loans not backed by the FHA have more flexible terms, and lenders have a wider variety of options when they don’t have to adhere to certain government rules.
Reposted from: http://www.realtor.com/advice/new-rules-make-fha-loans-look-tempting-theyre-not-everyone/
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