Many people choose to take loans with the Federal Housing Administration (FHA) because they require less of a down-payment, which is often seen as a plus for new home buyers. This type of loan is super flexible and lenient, but it isn't for everyone, and if you apply unaware of the pros and cons of this type of loan, you may be missing out on money saving opportunities in other places.
An FHA loan, also known as a Section 203(b) loan, is a unique type of loan that is insured against default by the FHA, so in the event that the borrower cannot pay, the FHA will so that the lender does not have to write off the loan. Because of this, lenders feel a sense of security and are more willing to agree to larger mortage loan sums.
A the Good about FHA loans:
- Low interest rates and no prepayment penalties.
- FHA loans given before 1986 are "assumable", meaning you can just pick up the old loan without having to trudge through the qualification process.
- You can utilize a "financial gift" from charitable organizations, government agencies, or even friends and family to use towards your down payment.
- Opportunities to get funding for home improvement through FHA 203k programs.
- You may be able to find leniency during financial hard times.
- You have to qualify with a reasonable debt to income ratio, which can prove problematic for adults still in repayment of their student loans, but some programs allow up to 55%.
- FHA loans have comparitively low limits, meaning they may not be able to provide the money if you need a considerably large loan.
- You need to have established credit. It doesn't have to be stellar, but it should be decent, and you should look at your credit report before even thinking about applying for one.
- They don't come in as many varieties as non-FHA loans.
- FHA loans have a rigid mortage insurance structure, pretty much meaning that once you agree, you're locked in to paying fees to them for a fixed amount of time/money. There is a 1% origination fee upfront, and then an annual sum of between 0.85-0.9%, which is paid monthly. It is required that you pay this premium on your loan for five years, regardless of you building sufficient equity or having a 20% loan to value ratio.
If you're considering buying a home in the southwest Washington area, contact us at Pacific Northwest, where we have realtors ready to help guide you through the twists and turns of real estate negotiations and financing to get you the best deal possible--stress free!