If you want a home loan, you can get one via the Federal Housing Administration (FHA) loan. However, in case you have a different option it is better to go for it as FHA loans are not the best choice. If you make a mistake while applying for the loan it may cost you a great deal. It is therefore important to be aware of what the loan entails before getting one. Here are some of the aspects you need to know about FHA loans before signing up for one.
FHA loans are valuable because they offer a more comfortable borrowing criteria and smaller down payment conditions which can be as low as 3. 5 percent. The difficulty to this type of loan is that if you’ve got a fantastic credit rating and substantial down payment, then you’re likely to pay more interest and fees for the loan as compared to other conventional loans. However, FHA loans may be the best option if your credit score is below 600. To determine whether you are qualified to apply for the loan, you can use an FHA affordability calculator for calculating your credit score. On the flip side, VA loan can be a better option than the FHA loan as the loan offers better terms for veterans who wish to own a house irrespective of your credit score. Also the USDA loan can be a better choice for people who want to purchase rural properties or live in a farm.
Another downside to FHA loan is that their use is limited. The loan is purposely for buying primary residence. The loan doesn’t cover the purchase of rental properties, vacation homes, or cottages. If you purchase such properties under the guise of your permanent residence and you are discovered, you’ll be highly penalized. The standard maximum amount of FHA loan allowed is $625, 000 as of 2016 although the calculation will factor in the locality of the house up to 115% of median home price in such an area.
Another limitation of FHA loan is that you can only use it to buy a livable house. That means you can’t use the loan to buy a condemned house with the expectations of fixing it. FHA loan doesn’t finance the purchase of residential property that does not meet its safety, security and livable standards. However, FHA 203(k) Rehab Mortgage can allow you to buy property which needs repairs but you must hire a general contractor to do the repairs instead of doing it yourself.
House flipping isn’t allowed as per FHA mortgage rules. You are also required to move into the house within 60 days after closing the purchase. Financing a house via FHA loan and then renting it out is categorized as bank fraud and is punishable as per FHA rules.