I was told by my fiance that we’re buying a house THIS fall sometime. Oh yeah, she also told me that the date she wants to get married is also this fall. Last but not least: We’re going to Hawaii for our honeymoon.
If it were up to me, I would buy the smallest, dirt cheap house available. I would get married at city hall. And I would honeymoon at White Castle. Not going to happen.
I’ve never priced out the price of a wedding (nor do I want to). I’ve also never bought a house before. It’s time to do some major research. There’s going to be more home-buying articles in the upcoming months (up from zero).
I talked to one of my home-owner friends yesterday. She told me she financed her home with a Federal Housing Administration (FHA) loan. An FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders.
FHA primarily serves people who cannot afford a conventional down payment. Typically, these are popular among first-time homebuyers (aka me).
I did some research and here are some advantages and disadvantages that I found to FHA loans.
Advantages of an FHA Loan
You only need 3% down payment.
First time home buyers usually don’t have a large chunk of downpayment to throw down on a house. You only need 3% down with an FHA loan. A $200,000 dollar house only requires a $6,000 dollar down payment. Horray!
They allow a higher debt-to-income ratio.
Lenders have a limit on how much debt you hold versus how much income you bring in. Obviously, more income and less debt is the most ideal situation. Word to the wise: Pay off your high-interest debt before buying a house.
Your credit doesn’t have to be as good as it would for a conventional loan.
A lender has a lesser risk loaning money to someone with a lower credit score since the loan is insured by the government. But your credit is great, right? Right.
Rates for an FHA loan are typically the same as a conventional loan given the same credit score.
This means that if I have a FICO credit score of 650, then both the conventional and FHA loan should offer the same interest rate. My credit score is higher than that but it’s nice to know that the FHA loan doesn’t penalize you.
The loan is assumable by someone else.
A mortgage loan that allows a new home purchaser to undertake the obligation of the existing loan with no change in loan terms.
Disadvantages of an FHA Loan
You essentially pay 2 mortgage insurance premiums (aka PMI).
There’s a one-time chunk of PMI that you need to pay. There’s also an additional monthly PMI that you have to pay which could add up to a huge chunk to your monthly payment.
The property needs to meet certain requirements.
FHA-insured loans are available in urban and rural areas for single family homes, for 2-unit, 3-unit, and 4-unit properties, and for condominiums. Also, the property can’t be worth more than a certain value.
There’s a maximum amount of money you can borrow depending on your area.
There’s a calculator here that will tell you the limit of what you can borrow in your area.
You could face a recapture tax on the property if you sell too soon.
Recapture is a Federal income tax that borrowers may have to pay if they sell or transfer their CHFA-financed home within 9 years.
For more information on FHA loans, visit the official website (http://www.hud.gov/).
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