Buying your first house is always the most challenging task of your life, but the USA’s government has made it a little easier for you by announcing FHA loans.
An FHA loan is a Federal House Administrative loan that a government agency guarantees. This type of loan requires a lower down payment, and therefore, a dream comes true for those who have never even thought of affording to buy a house.
You qualify for an FHA loan if you have a 3.5% down payment, 580 credit score, and 43% debt-to-income ratio. Even if you have a credit score greater than or equal to 500 but less than 580, you can still qualify for FHA loans, but now you need a 10% down payment. You can learn more about FHA loans here.
Pros and Cons of FHA Loans
The compatibility of FHA loans is still questioned as this type of loan has both pros and cons. Let’s find out the pros and cons of FHA loans and then decide how good FHA loans are:
Pros of FHA Loans
Here I have discussed four main benefits of FHA loans. Let us find out what these benefits are:
No Income Limits
The most significant advantage of FHA loans is that there is no income limit. In fact, if you have a higher income than the median of your area, you do not qualify for FHA loans. There are some FHA loans where there is no income limit, which is the most substantial advantage of this type of loan. Fannie Mae and Freddie Mac offer FHA loans at the down payment of 3% regardless of your income.
Another most significant advantage of FHA loans is that you avail the loan on any type of housing. Whether you want to buy a single-family house or a multi-family, a manufactured home, or a condominium, you can use an FHA loan to buy any type of house with a downpayment of 3.5% only.
Monthly Mortgage Insurance
If you do not have the money, additional troubles already surround you. The same is the case when you ask for a loan to buy a house. The lender will ask you for an additional mortgage to cover the risk of your default, that is, if you fail to repay the loan.
Nevertheless, you do not need to worry about paying additional mortgage insurance in FHA loans as you will be paying the same affordable mortgage irrespective of your credit ratings and down payment.
If your debt-to-income ratio is higher, you usually face difficulty asking for house loans as you require a high credit score with a high debt-to-income ratio. However, in FHA loans, your higher debt-to-income ratio is not an issue for loan providers as they even accept a debt-to-income ratio of 43% or above, making the dream of housing real for every individual.
Cons of FHA Loans
FHA loans are not the perfect loan scheme in the world and are surrounded by numerous disadvantages. Let’s find out some of the significant cons associated with FHA loans:
Lower Loan Limit
The demand for FHA loans is generally very high that limits the loan providers. FHA sets a loan limit, depending upon the country, every year, which means that you need to face a certain loan limit if you opt for an FHA loan.
The lower loan limit means that FHA loans permit you to buy a house under a specific limit, not what you might cherish.
Taking an FHA loan is equal to a mortgage insurance payment for a lifetime. Wonder why? Well, when you are buying at lower down payment, your mortgage insurance payment will increase. This payment will be stuck with you for a larger part of your life, and you can not change that while opting for FHA loans.
Although FHA loan providers have set a minimum down payment to 3.5%, some people still might struggle to pay this amount. There are government-backed loan schemes available at a lower down payment percentage. In such a scenario, the down payment set for FHA loans is usually causing a disadvantage to the providers in getting borrowers.
FHA loans come with significant restrictions that are not great to handle. When you buy a house, you will want the place to be entirely as you have always dreamt of. FHA loan providers have set some structural and safety restrictions that might hurdle you to get your desired house.
You can only buy the house with an FHA loan if you plan to live there as a primary residence. Also, the restrictions prevent you from purchasing a house in a specific area which might not sound appealing.
FHA loans are surely a dream that comes true for people who cannot afford to pay high down payments or are struggling with a high debt-to-income ratio. There are both pros and cons associated with FHA loans, but in the end, I would say you can compromise on some things and at least get your property named. The disadvantages are not too difficult to handle, and thus, I can say FHA loans are an excellent deal for middle or, in fact, lower-class people.
Lisa is a passionate travelers. She spends 3 months every year visiting different places worldwide. She has visited almost every famous place in the world. She herself is an affiliate blogger