FHA loans are a great tool to help homebuyers purchase or refinance a home. This week we will take a look at both the good and the bad of FHA Loans
The Mortgage Minute is weekly informational series presented by Laura Borja, Your San Diego Home Loan Expert.
What is an FHA loan?
An FHA loan is a loan that is insured by HUD or the Department of Housing and Urban Development.
FHA loans are meant for the purchase of owner-occupied properties (primary residences) only. However, you are able to purchase a multi-unit property as long as you reside in one of the units. Let’s say a that you buy a duplex. If you live on one side and rent at the other you would be able to use FHA financing.
Advantages of FHA Loans
Guidelines
The underwriting guidelines of an FHA loan tend to be much more relaxed as compared to conventional financing. Credit score requirements are not as stringent and debt to income ratio can be a little higher than compared to a conventional loan.
Down payment.
FHA do require a minimum of 3.5% down
Loan Amount Limits
FHA loan limits vary by area but in San Diego County, the amount is pretty high. The FHA loan limit in San Diego is $612,950.
Disadvantages of FHA Loans
Mortgage Insurance
FHA loans have both upfront mortgage insurance as well as monthly mortgage insurance. The fact that there is a mortgage insurance requirement is not necessarily a disadvantage as it is standard in most financing when there is very little down payment.
However, there are two big disadvantages of FHA Mortgage Insurance under the current guidelines
- FHA requires mortgage insurance on ALL loans regardless of the percentage of down payment.
- Unless you put at least 10% down you then you are going to be stuck with that monthly mortgage insurance for the entire life of the loan. There is no possibility of getting it removed regardless of the equity in your property.
Project approval
The other slight disadvantage is that if you are trying to purchase a condominium, the condominium project must be on the FHA approved list. That list is getting smaller and smaller as many developers are not through the process of getting the project FHA approved or the approvals have expired.
That means that if the condo you are trying to purchase does not have a current FHA approval, then the only way to finance a using FHA financing would be for you to get the entire project approved. The process is costly and can be a very lengthy.
There you have it. A quick look at FHA Loans.
If you have any questions on this topic or any other mortgage-related topic, by all means reach out to me.
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