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Pros and Cons of FHA Loans

Pros and Cons of FHA Loans

Closely evaluate the pros and cons of FHA loans, before you take the next step. Also understand the eligibility criteria. This will help you arrive at a decision.
Indrajit Deshmukh
When looking at the advantages and disadvantages of opting for FHA loans, 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. The agency insures loans sanctioned by banks and lending institutions to individuals who would otherwise find it difficult to get a loan.

These loans were aimed at stabilizing the home loan markets and providing an opportunity to the population who had limited means to own a home. The FHA came into existence in 1934 and since then, has been instrumental in increasing the size of the housing market. These loans are not sanctioned by the Federal Housing Administration, but are given by banks and other lending institutions. FHA insures these loans, allowing banks to disburse them to a population, inflicted with low earnings and less than average credit.

Eligibility

If you check the 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 evaluate your debt-to-income ratio and decide the amount of real estate loan you will get. That is, your debt and expenses will be subtracted from your income and the amount left over, will be evaluated for mortgage payments.

Pros
  • One of the biggest plus points of an FHA loan is the low down payment than most other mortgage loans offered by financial institutions. You can get this loan by putting down as low as 3 percent of the house cost, as your down payment.
  • These loans have no prepayment penalty and you can even borrow the down payment from a relative. When comparing the 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 repayment period, heavy penalties will not be levied. The terms of the contract are more lenient 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, set by taking your income to debt ratio into consideration, is far less than other conventional home mortgage loans.
  • Another con 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 of these loans, you need to maintain a good credit score over a considerable period of time. 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 are a lot of requirements that have to be met. The closing costs attributed to these loans are an obstacle in the deal.
It is advisable to weigh all the pros and cons, before you make a decision. Carefully reviewing the situation will allow you to avoid some of the pitfalls or help you take advantage of some of the provisions in the FHA loan scheme.