FHA Loans Pros and Cons

When looking at the FHA loans pros and cons it is important to understand what these loans are and who is eligible. The Federal Housing Administration (FHA) is an agency under the US department of Housing and Urban Development. FHA insures loans given by banks and lending institutes to individuals who would otherwise find it difficult to get a loan. These loans were aimed at stabilizing the home loan markets and to provide an opportunity to the population who had limited means to own a home. The FHA cam into existence in 1934 and since then has been instrumental in increasing the size of the housing market. These loans are not given by the Federal Housing Administration but are given by banks and other lending institutes. FHA insures these loans allowing banks to disburse them to a population inflicted with low earnings and less than average credit.

FHA Loan Qualifications

If you check the FHA loan requirements one of the main criteria is to have at least 2 years of steady employment. Applicants who have been employed in the same organization will be given preference, those who have changed employers should at least have the same income if not more. Individuals who have declared bankruptcy need to wait for at least 2 years before applying and need to maintain a good credit rating after their bankruptcy. Applicants who have a foreclosure on their credit history need to wait at least 3 years and need to maintain a good credit score in this period. The lending organization will take your debt to income ration and decide the amount of real estate loan you will get. For a better understanding your debt and expenses will be subtracted from your income and the amount left over will be evaluated for mortgage payments. The question are FHA loans good or bad can be decided after looking at the pro and cons of FHA loans.

Pros and Cons of FHA Loans

Pros

• One of the biggest plus point of an FHA loan is the low down payment than most other mortgage loans offered by financial institutions. You can get an FHA loan by putting down as low as 3 percent as your down payment.
• These loans have no pre payment penalty and you can even borrow the down payment from a relative. When comparing the FHA loans pros and cons this is one of the biggest plus points.
• These loans are federally insured loans so the lending institute is assured of repayment in any eventuality. This provision makes it easier for those with a bad credit rating to be eligible for the loan.
• If you are going through financial difficulties during the loan period heavy penalties will not be levied. The terms of the contract are more lenient on FHA loans than any other conventional loans.

Cons

• One of the biggest drawbacks of the FHA loan is the amount of money that you can borrow. The cap set on these loans taking into consideration you income to debt ratio is far less than other conventional home mortgage loans.
• Another con of an FHA loan is that a one percent loan origination fee is charged, which is not the case with most other loans. The processing time on these loans is considerably longer than on other conventional loans.
• To avail an FHA loan you need to maintain a good credit score over a period. You are also required to pay mortgage insurance upfront on your FHA loan and the amount could end up equaling 1.5 percent of the loan amount.
• If you decide to sell your property in the future it is going to be very difficult as there is a lot of requirements that have to be met. The closing costs attributed to FHA loans are one of the obstacles in the deal.

It is advisable to weigh all the FHA loans pros and cons before you make your decision. Carefully reviewing the situation will allow you to avoid some of the pit falls or take advantage of some of the provisions in the FHA loans scheme.