4 Things I Wish I’d Known Before I Got an FHA Loan
1. You’re on the hook for mortgage insurance for the life of the loan
Let’s get into the first thing you’ll have to factor in with an FHA loan: mortgage insurance.
This is a payment that’s usually required when the buyer isn’t putting 20% down. (You might know it as PMI, or private mortgage insurance; the FHA’s version is called MIP, or mortgage insurance premium.)
The buyer (you) must pay monthly mortgage insurance to protect the lender in case you default on your loan—it’s the price you pay for landing a mortgage with such lenient qualifications.
Now, the twist: It used to be that you had to pay this mortgage insurance on an FHA loan only until you gained 20% equity in your home. But under legislation passed in 2013, you can plan on paying that extra money for the life of the FHA loan. Yikes! (You can skirt this requirement if you put at least 10% down, but that kind of defeats the purpose of the sweet, low down payment option, right?)
All is not lost, though: Eventually, your monthly payments will go down as you whack away at your loan amount.
“But for the first few years, a buyer is paying mostly interest rather than principal, so the loan amount doesn’t go down for quite a while,” says Robert Harris, owner and mortgage consultant at All in One Lending.
2. You can’t buy just any house with an FHA loan
As long as the bank thinks you’re good for the loan, why wouldn’t you be able to buy any house you want? Well, the FHA has a few more hoops to jump through than conventional loans.
To be approved for the loan, the house must pass an inspection conducted by the U.S. Department of Housing and Urban Development. A licensed, HUD-approved appraiser will determine the market value of the home and do a “health and safety” inspection to check for crucial problems such as a crumbling foundation or issues with the mechanical systems.
“Many people don’t know that the guidelines can be pretty strict for an FHA loan,” says Paolo Matita, a former real estate agent who says the inspection was an issue for his FHA loan–holding clients. “The roof, AC unit, plumbing, and electrical all need to be fully functional and be able to last for several years if they’re going to pass inspection.”
(Note: This inspection is not a substitute for a regular home inspection, which you should absolutely get, too.)
What’s more, if the house requires certain repairs in order to pass inspection, they must be completed before the sale can go through. This can create another hurdle for FHA buyers: You either fork over the money to make the repairs, or ask the seller to take on the cost—a pretty big risk, especially in today’s seller’s market.
In the end, you might end up having to walk away from the deal.
3. You might not be able to use your FHA loan for renovations
My husband and I found a house that had potential but needed serious TLC. The home was under budget, so we thought we’d just tap the unused portion of the loan to make repairs. No biggie, right?
It turns out, the type of FHA loan we’d signed onto didn’t allow renovations. Had we done more research upfront, we would have discovered that there is a loan out there that would have allowed us to buy and repair that fixer-upper: an FHA 203(k) loan .
With a 203(k) loan, you can dedicate up to $35,000 for home improvements. The lender will have a say in what kinds of repairs you can make, but the 203(k) loan can be a great solution for first-time home buyers who don’t mind doing a little work.
4. You still need decent credit for an FHA loan
While we didn’t have ultrahigh credit scores, getting an FHA loan wasn’t a free-for-all: Buyers must have a 580 credit score to take advantage of the 3.5% down payment option. Lenders also have a stake, and will often demand a credit score of 600 or higher to qualify. (Our lender required a credit score of 665 or better.)
The FHA also has specific requirements about how much debt you can carry, so check current guidelines to make sure your debt is manageable in the eyes of the government.
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Call Today (617) 201-9188 Ana Roque – Realtor
Ana speaks 3 languages (Portuguese, English, Spanish), Wife, Stepmom, Journalist, Event Director for the National Association of Hispanic Real Estate Professionals (NAHREP) Central MA Chapter.
Ana is a self-motivated, goal-orientated and focused on building her career with partners and develop leadership with excellence to her teamwork as a mission to create a legacy to her clients and children.
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