I am a big supporter of home ownership. When buying a home it is crucial to look at your financial and credit situation and then match the best home loan to your needs. Using an FHA loan to buy a home is an excellent loan to use. Just as in buying a stock or a car, do your due diligence when choosing the right mortgage for your needs. When using an FHA loan there are certain items that a home buyer must know and think about when choosing this loan program.
- Down payment – For an FHA home loan the down payment is 3.5% and for a conventional it is 5%. Recently, mortgage lenders have introduced a conventional loan with a 3% down payment. In order to qualify for a three percent conventional loan- better overall credit is a requirement.
- FHA upfront funding fee – FHA has an upfront funding fee of 1.75% of the loan balance. It is typically rolled into the loan. For example, you are purchasing a home for $200,000 multiple that by 1.75% and your upfront funding fee would be $3,500. This would be added into your loan. This does increase your mortgage payment a little and possibly your closing costs.
- Mortgage insurance – Typically, mortgage insurance on an FHA loan can be two to three times
higher than a conventional loan. This will add more money to your monthly loan payment.
- Short sales might not work - With an FHA loan, like any other loan, an appraisal must be completed. With an FHA loan, the appraiser will do two things. He will appraise the home and then make sure the home is in livable condition according to FHA guidelines. FHA has specific guidelines on what determines if a home is livable and if the home does not fit those guidelines then certain repairs must be completed. If the repairs on not completed then FHA will not approve the loan. If a home buyer is buying a short sale, typically the bank does not do repairs. If this is the case, the repairs would be the responsibility of the home seller. Since it is a short sale, typically the home owner does not have the money to complete the repairs. When that happens then the repairs would be the responsibility of the home buyer to complete before the loan could move forward. This is risky because the bank has still not made a decision if they are going to approve the short sale.
- Paying for a re-inspection – Once the repairs that the FHA appraiser noted on the appraisal have been completed, the appraiser will have to go back to the house and check to make sure the repairs were completed and up to FHA guidelines. Once the appraiser confirms they are completed, he or she will then check off the repairs and the loan can proceed. When the appraiser does a re-inspection of the repairs it is an additional charge that will be added to the closing costs. It is typically $125.00 and paid by the buyer.
Overall, a majority of home buyers are using an FHA loan to buy their home. This is a great loan program IF it fits your financial needs. When deciding on a loan – really look at your financial situation to make sure you are getting the right loan for you. Make sure you interview mortgage brokers and choose one that will take the time to explain all the different loans programs and the qualifications. Then you will be able to make a good financial decision on what is best for you.