The Downsides Of Buying A Home With An FHA Loan
If you don’t have a lot of cash for a down payment, or you’re looking for a low interest rate, you might consider a loan from the Federal Housing Administration, better known as an FHA loan. But before you sign away, you should know the potential drawbacks.
The most obvious drawback of the FHA loan is that you have to pay a mortgage insurance premium. This covers the FHA’s butt in case you default or foreclose. Of course, if you put down less than 20% with conventional loan, you’ll have to pay insurance, too (aka private mortgage insurance). But the FHA also requires some of their premium to be paid upfront: 1.75% of the base loan amount.
Aside from that, FHA loans could make inspections hairy. Once you make an offer on a home, inspectors come check it out and see what you’re getting into. Maybe the foundation needs repair. Maybe some pipes are busted. Depending on their findings, this could be costly. Since the FHA is a federal loan, you’ll be dealing with stricter guidelines. Mortgage 101 puts it this way:
…anytime you deal with government programs, you know that there will be some problems. You will have to go by their guidelines and regulations throughout the whole process. You will be saddled with prepayment penalties and other hassles that you may not be used to with a conventional mortgage lender.
Also, some sellers don’t like dealing with FHA loans. They worry that FHA loan buyers might be a risk and that they won’t be able to pull together their final approval, which involves verifying income and assessing their debt situation. Along those same lines, if the seller knows the house will need some work, they might not bother accepting an FHA loan offer, because they figure the buyer won’t be able to afford the repairs.
Beyond that, some also argue that the FHA loan is borderline predatory, saying it encourages people to buy homes they can’t afford and default. That’s really a matter of opinion, though. The counterargument is: it gives people with poor credit a chance to buy a home at a reasonable interest rate.