4 Problems With Getting an FHA Loan That No One Talks About

A potential homeowner that is struggling to come up with twenty percent to put down on a house will be delighted to learn about an FHA loan.  Given by the Federal Housing Administration, this type of loan does not need twenty percent down, or even ten; it is a small percentage of just three and a half.  This can make it much easier for people to buy homes.

However, there are some drawbacks to an FHA loan that potential homeowners need to know.  

Changes  in Mortgage Insurance

Some buyers are aware of something called private mortgage insurance, while others are blindsided by the concept.  A lender will require borrowers to have private mortgage insurance on their loan if they do not put twenty percent down.

This is no different with an FHA loan.  Although, with an FHA loan it will be called mortgage insurance premium or MIP.  This insurance is in place in case the buyer stops paying on their loan and defaults.  It is there to protect the lender as with an FHA loan lenders are taking on a much higher risk of borrowers being unable to pay their mortgage. So they require this insurance to protect themselves.

Before this was not a major problem for many buyers.  They did not mind paying this additional cost because PMI is not required after reaching the mark of twenty percent of the equity in the home.  But now FHA loans require this premium to be paid for the life of the loan.

This can tack on a lot of money throughout the life of the loan. The additional fees can ultimately cost the buyer a lot more than if they had put twenty percent down.  

The good news is a person may still get an FHA loan and put ten percent down to avoid this extra premium.  While ten percent is a lot more for a down payment that the typical three and a half percent, it can be well worth it to save the money.  

Strict Regulations

Since the lender is putting themselves on the line, they want to know the home they are investing in is worth it.  Any house that is purchased with an FHA loan has to be approved first. This approval process will go through the U.S. Department of Housing and Urban Development.

The approval will be based on an inspection that must be completed by an appraiser that is HUD approved.  This appraiser will look at the house to determine the market value. They will also look for any problems that may jeopardize the health or safety of the buyer.  

This is what trips many buyers up. With such strict regulations for what is determined safe and healthy, it can be hard to find a house that can pass the inspection.  Many aspects of the home will be examined including the electrical, plumbing, roof, and other systems like the central air unit. All items must be in working condition and look like they will last for years to come in order to gain approval.

An FHA loan will not allow a buyer to make a purchase before repairs are complete.  This can leave the buyer forced to make a decision: they can invest their money into the property before it is officially theirs or they can ask the homeowners to make the repairs.  

In some areas, homeowners may be willing to make repairs if they are seeing few offers.  But in many areas, the homeowners have all the power and will go with the next best offer.

Needed Repairs

Be careful when applying for an FHA loan as some do not allow borrowers to use part of the loan to make repairs while others do.  If there is a house that hits all the buyer’s desires and is in the right location, but needs a few repairs it can be helpful to use part of the FHA loan to make these repairs.

An FHA 203(k) loan will allow a buyer to borrow money from the loan to pay for repairs.  With that type of loan, up to $35,000 can be used to make repairs. There will be guidelines on what repairs can be completed and the lender will be able to decide what is repaired and what is not.

Hard to Get

FHA loans are highly sought after for buyers that need a little help.  That does mean that the lender can have strict guidelines on who they accept.  Credit score plays a big part in this decision. Buyers will need to have a credit score of at least 580 to qualify.

However, most lenders have much higher expectations.  The average is a credit score of at least 600. There are also guidelines about the debts the borrower currently has.  If it is over a certain amount the borrower will not be approved.

All in all, FHA loans can be a great way for homeowners to buy a house with a small down payment, but there are some guidelines to pay attention to.