Things to Consider Prior to Applying for Federal Housing Administration Loan
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. This is because if you make a mistake while applying for FHA loan it can cost you a lot. 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 since they give a more comfortable borrowing criteria and smaller down payment requirements as low as 3. 5 percent. The problem to this type of loan is that if you’ve got a good credit score and substantial down payment, then you’re likely to pay more interest and fees on the loan compared to other conventional loans. However, FHA loans can 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 want to purchase a home irrespective of their 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’s purpose is to buy primary residence. The loan does not cover purchasing rental properties, vacation homes, or cottages. If you buy such properties under the guise of your permanent residence and you are discovered, you will 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 isn’t allowed as per FHA mortgage rules. You’re also required to move in the house within 60 days after closing the purchase. Financing a home via FHA loan and then renting it out is categorized as bank fraud and is punishable as per FHA rules.