You probably hear all good things about FHA loans and there are plenty. But there are also some reasons that it may not be the right type of loan for you. If any of the below situations apply to you, it may be best to find other loan programs.
You Need a Larger Loan Than is Allowed
FHA loans have loan limits and no two counties are the same. Each county has a maximum loan amount that they allow. If you find a home that requires a higher loan amount than the county’s limit, you can’t get it. You’ll have to look at other loan programs.
Typically, if you can’t get the loan amount you need with an FHA loan, you’ll have to turn to conventional financing. Don’t worry though; conventional financing isn’t as hard to get as you think. You’ll need a 5% down payment rather than a 3.5% down payment and you will need decent credit, but none of the requirements are so hard that it would be impossible to get.
You’ll Pay Mortgage Insurance for the Life of the Loan
One of the great things about conventional loans, when you put down less than 20%, is that you can cancel your PMI once you owe less than 80% of the home’s value. This can happen in one of two ways:
- You can pay the principal balance of the loan down to 80% of the value
- Your home can appreciate, bringing your LTV down with it
Once you hit that 80% mark, you can request that the lender cancel your PMI. If you forget to request it, the lender must cancel it once you owe less than 78% of the loan amount. It’s the law.
With an FHA loan, you pay mortgage insurance for the entire time that you have the loan. It doesn’t matter if you owe 85% or 5% of your home’s value, you will always pay mortgage insurance. If you refinance your FHA loan and take out another FHA loan, you’ll pay mortgage insurance on that loan too.
You’ll Pay Upfront Mortgage Insurance
In addition to the monthly mortgage insurance that you’ll pay for the life of the loan, you’ll also pay upfront mortgage insurance. You’ll pay this fee every time you take out a new FHA loan. The fee is equal to 1.75% of your loan amount. That’s a lot of money to add to your closing costs.
Let’s say you need to borrow $200,000, your upfront mortgage insurance would cost $3,500. This is on top of the closing costs that you’d pay, which could cost as much as 5% of your loan amount. This could mean a total of $10,000 plus $3,500 for the mortgage insurance. That’s a lot of money just to close on a loan.
The Property Restrictions are Tight
The FHA has strict property requirements that every home must meet in order to get an FHA loan on it. In general, the home must be safe, sound, and sanitary. This is a good thing as it can help you make sure that you buy a good property.
But, there could be little nuances that a home has that prevent it from passing the FHA guidelines. The appraiser has a strict set of rules it must follow in order to pass your home for an FHA loan. If it doesn’t, the appraiser can’t approve the home for FHA financing. This could leave you without a loan after you’ve already gotten pre-approved and been through a good portion of the underwriting process.
Sellers Often Balk at FHA Financing
Finally, many sellers don’t like to deal with FHA financing. A lot of it is due to the myths that get passed around regarding FHA loans. But some of it is true. For example, the property issues – if a seller knows that his property may not pass the FHA requirements, he may want to avoid those with FHA financing.
While the myths surrounding FHA loans are dissipating, they still exist in some markets. This could make it hard to win the bid on a home.
FHA financing has its good sides, but it has downsides too. If you take the time to look at both sides you can decide if it’s truly the right mortgage loan for you.