Government-backed loans from the Federal Housing Administration (FHA) may seem like a godsend for those that are trying to purchase a home despite a low income or credit problems in the past.
And while they have helped upwards of 30 million people to get homes since their inception in the 1930s, it’s not like the government is handing them out like candy.
There are requirements you’ll have to meet before you can be approved.
So here are just a few benefits and drawbacks that could help you decide if this is the type of loan you want to shoot for.
So quickly let me share with you the Pros and Cons of FHA loans
- Lower insurance premiums — The FHA bases their insurance rates on your closing costs, but they operate on the assumption that you are a low-income borrower, you have had prior difficulties with your credit history, or you have a little down payment. As a result, they tend to offer lower rates than private mortgage insurance providers (like Allstate, State Farm, and so on).
- Eligibility — Even banks that turn you down initially for a home loan may show interest when you get approved for an FHA loan. Not only will this provide incentive for the bank to offer you a loan (because they know they’ll get their money); it also means that if you can’t make payments for some reason, the FHA will take steps to help you stay in your home and get you back on track to make the payments on your own. All you have to do is meet the FHA criteria.
- Affordable financing — Because the FHA is making you a safer bet for lenders, they expect lenders to help you get a loan you can actually afford to pay. They do this in two ways. First, you cannot be approved for FHA mortgage backing unless you get a loan with monthly payments that are no more than 31% of your gross income (including mortgage, interest, and insurance). So lenders won’t be able to approve you for more than you can reasonably afford to pay. In addition, they encourage lenders that work with them to work with you to create financing that is affordable (they want to make sure you can make the payments). The result is that you have a better chance of getting a loan and actually paying it off.
- Steady employment — One of the main requirements to obtain FHA approval is steady employment, generally for a minimum of two years with the same employer. And during that time the salary cannot be reduced. So the ongoing recession (complete with salary cuts and layoffs) could mean a lot of applicants are no longer eligible.
- Clean credit history — Believe it or not, you can qualify for an FHA loan even if you’ve had a bankruptcy or foreclosure. But you must have a minimum of two years clean credit history with a bankruptcy (and have disbursed any court-ordered payments that resulted) and three years clean credit for a foreclosure. That means no defaults or even late payments for the last 2-3 years.
- FHA inspection — Because of the price range of homes that generally fall within the low-income category, securing FHA loans requires an FHA inspection and approval of any property in question before the sale can go through. So even if the house clears the lender’s required inspection, or a homeowner is willing to take a fixer-upper as is, the FHA may not approve, thus tanking the deal.