What is the downside to a FHA loan?
Drawbacks of Using an FHA Loan
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
Some sellers may believe that the added requirements and stricter appraisal standards cause FHA loans to take longer to close than conventional loans.
The FHA establishes loan limits annually based on the median home prices in metro areas and counties. The maximum loan amount is 115% of the area's median home price, subject to a national floor and ceiling. In 2024, the national floor is $498,257, and the national ceiling is $1,149,825.
FHA loans can only be used to finance a primary residence and may not be used to finance a second home, vacation home or rental property. High Debt Ratios. While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios.
FHA loans allow lower credit scores and require less elapsed time for major credit problems. Conventional loans, however, may require less paperwork and offer better options to avoid costly mortgage insurance premiums.
FHA loan benefits include low down payments, great interest rates, easier credit rules, and financing for 1-4 units.
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
Borrowers who take out FHA loans will likely face higher costs upfront and with every payment, and it could signal that they aren't ready for a mortgage. You'll also have to pay mortgage insurance, and FHA loans are less flexible than conventional loans.
While conventional mortgages usually require a credit score of 620 or more, FHA loans are open to borrowers with credit scores as low as 500. You don't need a big down payment. If your credit score is 580 or more, you could qualify to put down just 3.5%. Interest rates are competitive.
What will the FHA rates be in 2024?
FHA Mortgage Rate Predictions for 2024
Business Insider repeats the Fannie Mae prediction for 2024 that rates may reside between 6.4% and 7.1% for 30-year fixed-rate conventional mortgages.
Because FHA sets limits at 65% of conventional limits, FHA loan limits for a 1-unit property in a standard area increased from $472,030 in 2023 to $498,257 in 2024. Loan limits increased for 2-4 unit properties and homes in high-cost areas as well.
FHA mortgage limits are closely tied to conforming loan limits. Every year, the Federal Housing Finance Agency (FHFA) updates its home price index. This is used to set both conforming loan limits and FHA loan limits.
Common Safety, Soundness And Security Issues
Here are a few common issues that would disqualify a property from an FHA loan. Electrical: The electrical system must be up to code and provide adequate lighting. Heating: The heating systems must follow the local code and provide a comfortable temperature.
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
Loan program and purpose | Closing rate |
---|---|
Conventional purchase | 80% |
FHA refinance | 65% |
FHA purchase | 78% |
VA refinance | 72% |
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
Home sellers sometimes prefer conventional loans due to the stricter appraisal that's required with an FHA loan. An appraisal for an FHA loan might dig up more issues with the home, which in turn can delay the home sale process as the seller works to fix them.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option. These are only general guidelines, though.
Still, you can avoid FHA mortgage insurance by: Putting down 20 percent – This is the simplest way to avoid FHA mortgage insurance — but if you have the savings to put down 20 percent, it might make more sense to work on your credit score to qualify for a conventional loan instead.
Do most sellers accept FHA loans?
Some home sellers see an FHA loan as a “riskier” loan compared to a conventional loan because of the FHA loan's stricter appraisal requirements. Also, the loan's lenient financial requirements for borrowers may leave the seller with a negative perception.
FHA mortgage rates are often lower than rates for conventional mortgages. However, a lower interest rate does not always equate to a lower monthly payment. FHA mortgage insurance will increase your payments and the overall cost of the loan, even if the base rate is lower than for other loan types.
The FHA upfront mortgage insurance premium (UFMIP) is a one-time, lump-sum charge that's due at closing and typically added to your loan amount. The standard cost is 1.75% of your loan amount — for example, if you borrow $300,000 with an FHA loan, the UFMIP charge is $5,250 ($300,000 x 0.0175 = $5,250).
If you're getting an FHA loan, you can roll the closing costs into the mortgage. While your initial payment will be lessened, you'll pay them back over time.
FHA loans allow borrowers with a credit score of 580 or above to purchase a house with a down payment as low as 3.5% of the purchase price. Borrowers with credit scores between 500 and 579 need at least 10% down. Keep in mind, these are the minimums set by HUD, but lenders may have their own minimums.
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