If you’re in the market for a home or looking to refinance, you might want to check into an FHA home loan. In fact, as I’ve noted, access to FHA loans is a cornerstone of the housing rescue bill that was recently signed into law. With that as a backdrop, I thought I’d take a closer look at this sort of mortgage.
What is an FHA home loan?
FHA loans are mortgages that are insured by the Federal Housing Administration. The FHA doesn’t actually make loans; rather, they insure loans issued by federally qualified lenders. These loans are only made to individuals and non-profit/government agencies that are approved to participate in U.S. Department of Housing and Urban Development (HUD) programs (more on qualifying, below).
Advantages of an FHA vs. conventional home loans
FHA home loans have a number of advantages over conventional home loans. These include a lower required downpayment, competitive interest rates, lower closing costs that can be included in the amount of the loan, the ability to include re-modeling/repair costs in the amount of the loan, no pre-payment penalty, and possible leniency during hard financial times, which may translate into a reduced risk of foreclosure.
You can also often qualify for an FHA loan even if you’ve had relatively recent financial problems. For example, you may be able to obtain an FHA loan within 2-3 years of bankruptcy or foreclosure as long of you’ve maintained good credit in the mean time. It’s also easier to use gifts to cover your downpayment and/or closing costs when using an FHA loan product.
Disadvantages of an FHA vs. conventional home loan
Despite the foregoing advantages of FHA loans, there are also some drawbacks of this type of mortgage. For example, an FHA loan might not be large enough to cover the cost of the home your are interested in buying. While the FHA periodically increases their limits, these sorts of limits are a big part of the reason that FHA loans lost favor starting in the 1990s – as home prices began shooting up, more and more properties were ineligible for an FHA loan. If you’re curious about FHA loan limits in your area, check out this calculator.
Another potential disadvantage of FHA home loans is that they don’t come in as many flavors as conventional loans. Rather, they’re designed specifically to serve the needs of long-term homeowners, and thus tend to have relatively conservative terms. In addition, while you might end up paying private mortgage insurance (PMI) on a standard home loan, the insurance premiums associated with an FHA home loan are built into the loan, such that you may end up paying more for your mortgage insurance over the life of the loan.
Qualifying for an FHA home loan
While anyone can apply for an FHA home loan, they are most frequently used by first-time homebuyers. To apply, you must have a valid social security number and be a legal U.S. resident. The FHA’s mortgage programs do not typically have income limits, though you must have sufficient income to qualify for the mortgage payment alongside any other debts that you might have. Likewise, the FHA doesn’t have minimum credit score requirements, though past credit performance will likely be used in determining eligibility.
For more information about FHA Loans check out the FHA experts blog at FHALoanPros.com
My first home loan was through FHA. I was 23 and didn’t have any credit history. Took a long time to put the paperwork together but it was a great way to get started.
I don’t know if it is company specific, but a mortgage company informed me yesterday that FHA now had a minimum credit score requirement. I believe it was either 530 or 560 (not positive.)
When we purchased our home, it was owned by the bank, but required a couple of small repairs. The bank wouldn’t do the work, but we couldn’t get financing without the work being done. So, we actually went into the house and did the work prior to owning the home. We didn’t feel real great about that arrangement, but the work was rather minimal. That was just to get a conventional loan approved. There were a couple of additional items that would have had to be fixed pre-closing if we were going the FHA route.
I am closing on a home tommorow with an FHA loan. The inspector wasnt too harsh and only required a few minor repairs that I had already worked out with the seller. The great thing was I got all of my closing paid for and I got a great rate despite being out of college one year and having very little credit history.
It’s going to be a pain in the ass to keep track of all those sales… guess that IRS code manual gets bigger and bigger and bigger.
Jesse: That’s a good point, though the standards have actually decreased in recent years. Apparently sellers used to be willing to accept a lower price if a buyer was willing to get a conventional loan instead of going the FHA route, since the latter had such strict standards concerning the condition of the house.
In addition to the buyer having to qualify, we were told that the house you intend to buy must also meet certain qualifications in order to use a FHA loan. My wife and I bought our first home six months ago. The house needed a fair amount of work and because of that, didn’t qualify for FHA financing. We ended up going with a conventional loan and actually got a better rate.