FHA Loans Pros and Cons

posted 6/10/2015 in Mortgage

FHA Loans: Pros and Cons

Mortgage interest rates have been at record low levels for several years now and that has a lot of people wondering if now is the time to get the home of their dreams. These attractive rates and the rebounding economy have the housing market in Iowa stronger than it has been in years. But more stringent regulations and credit requirements still make getting a mortgage tougher than it was before the housing meltdown.

One government program that has long helped low and middle-income borrowers purchase homes is the Federal Housing Administration (FHA). Congress created this agency at the height of the Great Depression, and it officially became an agency under the US Department of Housing and Urban Development's (HUD) in 1965. Since 1934, the FHA has insured over 34 million home loans and the program continues strong today.

How FHA Loans Work

Home buyers obtain home loans through FHA approved lenders, not directly through the FHA. The role of the FHA is to insure the loan, protecting lenders from losses in the event the borrower can’t pay and defaults on the loan. Lenders must meet FHA guidelines to participate in the program.

The property must also meet minimum property standards as established by the FHA. The determination on whether a home meets minimum property standards happens during a standard house appraisal. The FHA mortgages are made for all kinds of properties including townhomes, condos, and single-family homes.

Benefits of FHA Loans

Although anyone can apply for an FHA loan, it is often considered the best option for borrowers who would otherwise have difficulty getting a conventional mortgage due to limited assets or income. FHA loans are attractive to borrowers with limited means for several reasons. The down payment can be as low as 3.5 percent, credit requirements are less strict than for conventional loans and interest rates are often lower.

Closing costs for borrowers can also be reduced because the FHA allows home sellers and lenders to pay some of the borrower's closing costs, such as an appraisal, credit report or title expenses. If you are thinking of buying a fixer upper, there’s also a feature called a 203(k) loan that allows borrowers to obtain extra cash to make repairs to their homes. With a 203(k) loan, amount you can borrow is based the projected value after the repairs are completed, not on the current appraised value of the home.
 
Drawback of FHA Loans

An FHA loan isn’t right for everyone, however. If you have the ability to put down a larger down payment and your credit is good, you will build equity faster and save money in the long run by paying less interest on a smaller principal balance.

In addition, there are loan limits to consider. If you are looking for a house on the more expensive side, an FHA loan may not be available. FHA loan limits are updated each year and vary by region.  

Another factor that may make an FHA loan more expensive in the end is the Mortgage Insurance Premium (MIP) required by the program. Borrowers pay MIP for the life of the loan. This is different from conventional loans where borrowers pay Private Mortgage Insurance (PMI), a conventional mortgage loan’s MIP equivalent. Unlike MIP payments, PMI can be dropped once you have repaid a portion of the mortgage loan (usually 20%). When you look at the full term of the loan, this can make a significant difference in the total amount paid for the home.

Purchasing a home is the largest financial investment many of us will ever make so it’s important to do your homework. Let Lincoln Savings Bank help you find your next home with confidence, knowing you are ready to buy when the right home appears. If you think an FHA loan may be right for you, you can start the mortgage process with our convenient online tools. First step, visit our Mortgage Launchpad and in a few simple steps, you'll be on your way.

If you prefer personal assistance rather than online help, you can contact us at one of our many Iowa locations and one of our mortgage experts will be happy to answer your questions.

Lincoln Savings Bank, Member FDIC, Equal Housing Lender
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