How to Evaluate an FHA Mortgage Loan

FHA mortgage loans are not provided straight from the federal agency. Rather, they are distributed by private lenders and then guaranteed by the FHA. This guaranty means the FHA will purchase your loan out of default from the private lender if you can no longer make your payments. With the guaranty, the risk to the borrower is diminished, and the expense of the loan also drops. FHA loans have a host of advantages, but they also have some disadvantages.

Low Cost Loans

The main advantage of these loans is their lower interest rate. You will find they cost you, the borrower, less over time. The origination fees and closing costs may also be lower with an FHA loan. In fact, there are first time home buyer grants that can help cover these costs for those individuals entering their first mortgage. You must apply separately for these grants.

Low Down Payment Loans

For qualified applicants, the down payment on these loans can be as low as 3.5%. First time home buyers are particularly eligible for down payment savings. The loans do require mortgage insurance, however, which is costlier with a lower down payment. Those individuals able to place 20% or more down on the home will find the insurance premiums are greatly reduced.

Less Flexible

In return for all of the benefits of an FHA loan, the agency will ask you to make guarantees to them as well. These guarantees limit the amount of debt you can take in addition to your mortgage. You may be prevented from taking home equity loans or making significant changes to the property. You may be prevented from renting or leasing the home or part of the home. There is a requirement stating the person applying for and signing the loan must live in the property once the loan is funded.

High Lending Standards

It is a common misconception that you can qualify for an FHA loan with low credit. In fact, these loans typically have higher standards than other private loans. The income requirements are slightly more flexible, and the agency encourages borrowing for low to middle income families. On the whole, though, your debt to income ratio must be low and your credit score must be high to gain approval.

Lengthy Application Process

When you work with the government, you can expect delays. Your loan will take a longer time to fund, and it may meet delays in distribution. If you are looking to purchase a home immediately, like a short sale or foreclosure property, then you may find this a challenge with an FHA loan. Look for lenders that are FHA qualified so you can streamline the process with only one application.

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