FHA Loans- Pros and Cons
The pros and cons of an FHA Loan start with the down payment amount. If you're someone who is looking to buy a home in California but doesn't have enough money for a down payment then an FHA Loan may be what you need. Typically, mortgage loans require 10% to 20% down payments which can be pretty difficult to manage for most individuals. However, FHA loans require only 3.5% down payment hence making it a great option for first time home buyers.
How Do You Define an FHA Loan?
A mortgage that is insured by the Federal Housing Administration is known as the FHA Loan. These loans have less restrictive credit requirements as compared to other loans. They allow you to make a minimum down payment of 3.5%. FHA Loans are not only beneficial for individuals who want to buy a new house, but they can also be of great benefit to individuals who want the renovation to be done at their existing house.
What Are the Different Types of FHA Loans?
Before filling out applications for an FHA Loan, you should have complete knowledge regarding the types of loans. This will help you in making the right choice based upon your needs.
203(b) Basic Home Mortgage Loan
The standard FHA Loan has a lot of advantages. You can put as little as 3.5% down and even have your down payment gifted from a friend or relative. You will have to pay PMI until your equity gets to 80%, however.
203(k) FHA Loan Program
The 203(k) program offers financing up to $35,000 rolled into a mortgage for the renovation of a house. With inventory tight in the Phoenix market buying and rehabbing a fixer upper with a 203k loan might be the way to go.
Construction to Permanent Loan
If you're someone who wants to build the house according to your own personal preference, these loans can help you in that regard as well. The construction to permanent loan will provide financing for the complete construction of the house.
How Can an Individual Qualify for An FHA Loan?
In order to qualify for an FHA loan, you will have to meet a certain number of requirements. Lenders usually follow certain regulations after receiving applications for loans. However, it is important to know that lenders may also have other stipulations in addition to the FHA's minimum requirements. The lending process may vary according to some factors such as the down payment amount and the credit scores.
- Minimum Credit Score
- In order to qualify for an FHA loan with a down payment as low as 3.5%, you will need to get a minimum credit score of 580. However, if you get a credit score between 500 and 579, you will be able to qualify for a down payment of 10%.
- Debt-To-Income Ratio
- In order to qualify for an FHA loan, your monthly debt payments (including mortgages) cannot exceed 43% of your gross income.
- In order to qualify for an FHA loan, your total house payment cannot exceed 31% of your gross monthly income.
- Keep in mind that all of the above-mentioned requirements will be verified by your lender before an FHA loan is provided. The interest rates, as well as loan terms, may vary from time to time. The best bet for you would be to visit as many lenders as possible. This will help you in getting the most favourable terms for your situation.
What Debts Are to Be Included in The FHA Debt-To-Income Ratios?
To make sure that your application doesn't get rejected, you need to make a rough calculation of the debt-to-income ratio and you need to make sure that it is not more than 43% of your gross income. Debts that you need to keep in mind are listed down below.
- Payments for Auto loan
- Mortgage payments
- Payments for Student loan
- Credit card or lines of credit payments
- Alimony and child support
- IRS and state income tax payment plans
- Payments for a proposed new mortgage
- Insurance, tax and association dues on clear and free properties including lands
- Other installment loans or leases
What Are the Limits for An FHA Loan?
The FHA loans in Arizona are more targeted towards first-time homebuyers rather than people who want to upgrade to a bigger house. Hence, they tend to have limits as to how much can be borrowed.
The floor limit for FHA loans increased from $314,827 in 2019 to $331,760 in 2020. However, the limits can be higher in places that have higher property rates. Maricopa County, Arizona has a $331,760 limit for a single-family home and a $424,800 limit for a duplex.
How Do You Pay for An FHA Loan and What Is the Fee and Insurance Policy?
To pay for FHA loans, you will need to have an impound account. Normally, lenders require you to make the payments once or twice a year. However, the FHA reduces the risk of default by asking you to pay the bills on monthly basis via the impound account.
You must pay an upfront premium fee of 1.75% of the loan amount when getting an FHA mortgage loan. This fee can be paid in cash when the deal is closed or it can also be rolled into the loan amount. In addition to this fee, a monthly premium fee varying between 0.45% and 1.05% of the loan amount per annum is added to the mortgage payments. This percentage depends upon factors like the loan amount, the size of the down payment and the number of years the loan is financed for.
FHA Loans Pros and Cons
Before filling out applications, it is necessary to gain knowledge about the FHA loans pros and cons. The FHA loans pros and cons will help you out in making an informed decision, a one that you won't regret in the future.
Pros of FHA Loans
- You may be able to get an FHA loan for a down payment as low as 3.5% if you gain a credit score of 580 or above.
- Financial gifts or down payment gifts are permitted by the FHA if you meet the FHA requirements.
- Loans are even offered at credit scores as low as 500.
- Home sellers are allowed to pay up to 6% of the closing costs for a loan by the FHA.
Cons of FHA Loans
- You may have to pay a one-time upfront mortgage premium fee as well as annual premium in form of monthly payments for making a small down payment which increases the overall cost.
- There may be a borrowing limit that depends upon the area in which you want to get the loan and these limits may change with time.
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