Purchasing a home can be one of the most exciting times in a person’s life. You get to look through a number of different homes, and find the one that’s perfect for you. You get to visit a bunch of different mortgage companies to get the best rate, and you get to figure out what type of loan you are going to get, which includes a loan from the Federal Housing Administration, the Veteran’s Administration, or if your mortgage will be written using conventional underwriting guidelines. One of thee three options is a FHA (Federal Housing Administration) loan. There are some advantages and disadvantages in using this type of loan that you should know before choosing to have an FHA Loan.
Basically a FHA loan is a federal assistance mortgage loan in which the loan is insured by the Federal Housing Administration that federally qualified lender can use. So if for some reason you get behind on your mortgage and your home is foreclosed on, the FHA will pay the mortgage company the difference that your house does not bring.
One of the primary advantages is that it serves people who cannot afford a conventional down payment, which makes the loan very popular for people who are buying homes for the first time. In order to qualify for an FHA loan, you only need to make a 3% down payment, which makes it so appealin to a lot of first time home buyers who are just starting out.
FHA loans also allow for a higher debt to income ratio compared to conventional loans. Ideally, we would have very low amounts of debt and very high amounts of income, but hat doesn’t always happen, especially if you are just starting out. Even though the FHA allows a higher debt to income ratio, you should be careful because having a lot of debt when getting into a home for the first time can lead to financial hardship. Additionally, you will get the same interest rates as a conventional loan, which is definitely a good thing!
There are a few disadvantages of having an FHA loan that you should know about. You will have to pay more in private mortgage insurance since the down payment is much lower. There’s first a one time fee for PMI that you need to pay and a monthly payment which can get rather costly. It might be more beneficial to wait until you can afford to pay a 20% down payment. FHA loans also have to meet a number of requirements, including limitations on the types of homes and the amount of money you can borrow depending on your area. In the event that you sell your home within 9 years, you could also be facing a federal recapture tax which you should look into.
A FHA loan is a decent option for people who just cannot wait to get a house and can’t be convinced otherwise that they should wait until they are more financially secure to purchase a home. If you can wait to buy a house, save up a 20% down payment and get a conventional loan.
