ScaredyCatGuide to Real Estate - FHA LOANS (A quick and easy guide)
When people are looking to purchase a home, financing is one of their biggest concerns. Let's discuss FHA loans, it is one of many available, but serves a specific purpose that may fit you needs.
FHA Loans
This loan is insured by the Federal Housing Authority, hence the name FHA. This insurance enables lenders to approve mortgages that do not meet those required on traditional loans.
However, the key here is this loan is only for owner occupants. You must live in the home to get this loan (at least until you refinance out into a traditional loan).
Some of the benefits to FHA Loans
Small down payment:
As little as 3.5% can be put down on a property. This makes it much easier for people to come up with the money to get into a home. Furthermore, that down payment can be received as a gift.
Say, a relative wants to provide the 7k down payment needed for a 200k home purchase. That can be done as a gift and is below the IRS gift threshold of 14k per year, making it a simple non-taxable transaction.
Sellers can contribute more to closing costs
If you negotiate with the seller to pay some closing costs, it is capped at 3% of the purchase price for traditional mortgages. However, with FHA loans it is double at 6%, which opens up the option of the seller paying all the closing costs.
Note: Closing costs usually run around 4-6% of purchase price depending on the state it is located.
Those are just a couple of the benefits of an FHA loan.
Negatives to FHA Loan:
Mortgage Insurance:
Just because the FHA is backing the loan doesn’t mean you will not be paying insurance on it. Basically anytime you put down less than 20% on a property you will be paying for mortgage insurance.
For FHA loans, once you have built 78% equity in your property you can request to stop paying mortgage insurance. FHA loans do require that you pay for five years so even if a mortgage was prepaid down to 78% before then the owner would still pay insurance until five years is complete.
You can see the full article with other pros and cons here: http://scaredycatguide.com/fha-loans-a-quick-and-easy-guide/
Conclusion
Remember, whether it's a mortgage, home or contractor - always shop around and get a few quotes.
Best Regards,
I would refinance those home loans now while the rates are so low! They will not always be this low.
Heck yeah, to be honest. The rental property I acquired in February, most of the motivation was to get a 30 yr loan locked in at these rates.
beside to every month PMI, FHA loans require to pay 1% for PMI in closing cost.
What is why I consider FHA loans as a legal robbery.
The much better option is conventional loans with 5% down. You wouldn't pay 1% for noting to PMI inside your closing cost and then monthly PMI would be around twice less than for FHA loans. Also you are not required to live in this building.
Well said! I'm with you. I personally refuse to pay PMI and have been lucky enough to afford 20% down on all my properties. Unfortunately, many people struggle to come up with 3.5% and thus use this loan for that benefit.
When I bought my home my lender-bank insisted to take FHA loan and after checking all numbers we refused a sale.
I decided it just doesn't have any sense to pay 1% PMI inside closing cost for noting because I'd rather add this 1% to my down payment ,find additional 0.5% to make 5% down and take conventional loan instead of FHA.
Also I compared monthly PMI payments for both for the same property - $315 for FHA and $157 for conventional. for me it was just nonsense to take FHA loan.
we were lucky. Market went up and instead of waiting required 2 year for removing PMI, I refinance our home after 1 year without PMI
I remember, but might be I'm wrong FHA also has some time period when you cannot refinance it. Something 3 or 5 years.
You definitely made the right move. Yeah FHA makes you pay PMI for minimum of 5 years, regardless of the equity you have in the home. It's kind of crazy.
@scaredycatguide