Lately I have had several new buyers that have questioned whether they should use an FHA loan or not. For some, it may be the only option, for others, they may have a choice.
Many potential buyers think that FHA mortgages are not a good idea, but that may not be the case. For some buyers, FHA is a great way to get into a new home. The biggest drawback to a FHA mortgage is that the mortgage insurance does not go away, however you are only putting 3.5% down. So it may be several years before you have 20% equity in the home anyway – so does it matter? FHA lowered it's monthly mortgage insurance to .85% and typically the interest rate is much lower on a FHA loan compared to conventional financing. If you are concerned about paying mortgage insurance, think about how long you will be in this home. Would it make sense to think about refinancing down the road to eliminate mortgage insurance? Maybe. If you think you will sell the home before you have enough equity to eliminate MI, then it doesn't matter.
FHA only requires 3.5% down, so that will help those that are trying to save money for a down payment. This can allow buyers to keep money in reserve to cover any emergencies that come up with the new home. You can also ask the seller to pay closing costs to help you keep your savings.
FHA allows you to purchase a home after a bankruptcy or foreclosure much sooner than conventional loans do. If you have had a bankruptcy, you can get an FHA mortgage two years after the bankruptcy was discharged. Conventional loans require 4 years. If you have had a foreclosure, FHA only requires you to wait 3 years from the sheriff sale date (or the date that HUD paid the claim on a FHA mortgage). Conventional loans require seven years. If you filed a chapter 13 bankruptcy, you can purchase a home with a FHA mortgage as soon as one year after you file. You do need to show that all your payments are on time since you filed the chapter 13.
Does the home you want to buy need renovation? FHA has a 203K rehab loan that will allow you to purchase the home and cover the rehab costs in the mortgage. This can be a great loan for those purchasing a home that was foreclosed on and needs repairs. Maybe the home just needs some updating – paint, maybe new carpet and appliances? – a 203K rehab loan will allow you to do this things right away so the repairs are all complete within a couple months after you purchase your home!
FHA loans can be a great way to purchase your new home, talk to your loan officer about all your options so you can make an informed decision. You want to make sure your mortgage will make sense! Then start looking for your new home!