Aspects to Consider Prior to Applying for Federal Housing Administration Loan
If you’d like a home loan, then you can get one via the Federal Housing Administration (FHA) loan. However, in case you have a different option it is better to go for it as FHA loans are not the best choice. If you make a mistake while applying for the loan it can cost you a lot. It is therefore crucial to have in mind what the loan entails before getting one. Here are a few of the aspects you need to know about FHA loans before applying for the loan.
FHA loans are beneficial because they offer a more relaxed borrowing standards and smaller down payment requirements which is as low as 3. 5%. The problem to this type of loan is that if you’ve got a good credit score and substantial down payment, then you’re likely to pay more interest and fees on the loan compared to other conventional loans. However, FHA loans can be the best option if your credit score is below 600. To determine whether you are qualified to apply for the loan, you can use an FHA affordability calculator for calculating your credit score. On the flip side, VA loan can be a better option than the FHA loan as the loan offers better terms for veterans who wish to own a house irrespective of your credit score. Also the USDA loan can be a better choice for those who want to buy rural properties or live in a farm.
Another downside to FHA loan is that their use is limited. The loan’s purpose is to buy primary residence. The loan does not cover purchasing rental properties, vacation homes, or cottages. If you buy such properties under the guise of your permanent residence and you are discovered, you will be highly penalized. The standard maximum amount of FHA loan allowed is $625, 000 as of 2016 although the calculation will factor in the region where the home is found up to 115% of median home price in such an area.
Another limitation of FHA loan is that it can only be used to purchase a livable house. This means that you can’t use the loan to purchase a condemned house with plans of fixing it. FHA loan doesn’t finance the purchase of residential property that does not meet its safety, security and livable standards. However, FHA 203(k) Rehab Mortgage can allow you to buy property which needs repairs but you must hire a general contractor to do the repairs instead of doing it yourself.
House flipping is not allowed as per FHA mortgage rules. You are also required to move into the house within 60 days after closing the purchase. Financing a home via FHA loan and then renting it out is categorized as bank fraud and is punishable as per FHA rules.
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