If you thought an FHA loan could be quite appealing because of the relaxed restrictions, there are some potential pitfalls you should know about too.
An FHA loan is definitely easier to qualify when it comes to purchasing your dream home. These are mortgages that are insured by the FHA or the Federal Housing Administration. Therefore the restrictions here are more relaxed when compared to conventional mortgages. However, you may have to pay a premium as the government may not insure this loan.
Here are some pros and cons that you need to know before going in for an FHA loan:
Accessible Home-ownership: 3.5% down payment is what you will need in order to qualify for an FHA loan. This makes homeownership much more accessible.
No Credit Score Worries: You can apply for a FHA loan even if you have a low credit score. However, you must have two lines of credit and you have to prove that you have been paying off all your credit-card debts promptly. If you can do this you can still bag a FHA loan at a good interest rate.
Seller pays more closing costs: While conventional mortgages require the sellers to pay only 2% of the closing costs, FHA loans mandate them to pay 6% of the closing costs. Therefore FHA loan may work well for you when it is a buyer’s market out there.
Gift for Down-payment: FHA loan makes it easier for you to pay your down payment via some money that you received as a gift. This could be through a grant program offered by your state.
If you have been struggling to save up money to make that 20% down payment or if you have had a ‘not-so-good’ credit history, FHA loan may be a wise option for you.
The cons or the ‘Potential pitfalls’ of FHA loan:
High Fees: Although you might find the initial mortgage rate competitive, the insurance fees that you have to pay in case of FHA loans might bog you down. You may have to pay an upfront fee of 1.75% and then 0.85% ongoing monthly fee if your mortgage term is 15 years or more. The ongoing fee might reduce to 0.80% if your loan-to-value ratio is lower than 95%.
Permanent Insurance: In case of a conventional mortgage you can remove the mortgage insurance after a period of five years. However, in case of FHA loans, you will have to pay the insurance for the entire term of the loan.
So, should you still go for a FHA loan?
This depends upon many factors such as your ability to make the down payment, your credit history and your chances of qualifying for a conventional mortgage loan.
As a rule, if you cannot or do not wish to make a down payment which is more than 5%, it is better you go for a FHA loan. However, you need to remember that in case of a long mortgage term, FHA can become very expensive when compared to a conventional loan. So, weigh your options before making your final decision.
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