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Are FHA loans a good choice?
When you apply for a home loan, your loan officer will review your loan file to see if you qualify. Depending on your scenario, the two most popular loan types you're likely to hear about are Conventional and FHA. Each has its advantages and disadvantages. For some reason, there is a lot of hype about FHA loans, and I hear a lot of negative comments about it. This article will help to dispense the negative tone and give you the pros and cons of the program.
We'll start with the cons, I can think of only one, which is how FHA handles its mortgage insurance. Depending on how much you have in equity, your monthly mortgage insurance will last for either 11 years, or, the life of the loan. It doesn't matter how far down you get the balance over time.., it's going to be 11 years or through the end of the loan, no matter what you do. Since mortgage insurance does not cover you at all, the amount you pay each month is a total waste of money.
The only way to get rid of the monthly mortgage insurance is to refinance into another non-FHA loan. Despite this though, having mortgage insurance for a while is worth it; especially when FHA allows you to do things Conventional loans won't.
Major credit events
A lot of us got caught in the crash back in the day. The economy had a lot of people out of work which resulted in a large portion of the population having to do foreclosures, short sales, bankruptcies, and deeds to avoid foreclosure. The amount of time you need to wait to get a new mortgage is less with an FHA loan then it is for a Conventional loan.
Higher debt ratios
Although a lot goes into how high your debt ratio can go, in general, the benchmark for Conventional is around 45%. With an FHA loan, the debt ratios can go as high as 57%. As a rule, a single person should not go forward with a transaction using 57% of their income to qualify. But, if you're married or in a relationship, it would be ok because you do have another income coming in. So for instance, the husband and wife want to buy a home. The loan is processed in the wife's name because she has a better credit score. The wife's ratios using her income are 57%. That would be ok because the husband's income can be used to help handle other household debts.
Under the Conventional loan guidelines, a buyer is allowed to received 3% of the contract price as a credit to be applied towards closing costs. With FHA, a buyer can get 6% of the contract price. Often first time home buyers save for their down payment easily, but, don't have quite enough money to cover all of their closing costs too. Getting this extra 3% from the seller is incredibly helpful.
I honestly don't know why the FHA loan program gets a bad wrap. Admittedly the mortgage insurance is not the best, but, I say so what?! Use the program and take advantage of the benefits above to buy your first home. You can always refinance later on into Conventional to get rid of the mortgage insurance down the road.
If applying for a home loan is in your plans, contact a mortgage professional now for a review of your overall credit profile. Doing so, and making a plan together will guarantee that you'll have a smooth and stress-free loan process from start to finish!
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