Factors to Consider before Applying for Federal Housing Administration Loan
If you’d like a home loan, then 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 there is therefore important to know what the loan entails before getting one. Below are a few of the aspects you need to know about FHA loans prior to signing up for one.
FHA loans are beneficial because they offer a more relaxed borrowing standards and smaller down payment requirements which is as low as 3. 5%. The problem to this type of loan is that if you have a good credit rating and large down payment, then you are likely to pay more interest and fees for the loan as compared to other conventional loans. But, FHA loans can be the best choice 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 those who want to buy rural properties or live in a farm.
Another downside to FHA loan is that their use is constrained. 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 region where the home is found 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. This means you can’t use the loan to purchase a condemned house with the expectations of fixing it. FHA loan doesn’t finance the purchase of homes that doesn’t meet its safety, security and livability 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 is not 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.