4 Things You Should Know About FHA Loans


FHA loans are more popular now than they have been for years. With mortgage lenders tightening their standards and requiring larger down payments, the 3.5% down payment required for an FHA loan seems down-right generous. Additionally, many mortgage lenders are more willing to lend if you can get a loan insured by the Federal Housing Administration.

Before you finalize your paperwork, consider these four things you should know about FHA mortgage loans:

1. Any income qualifies

Many government programs are limited to those with lower incomes. An FHA loan, though, is available to anyone with any limit. Even though who make millions can qualify for an FHA loan. The overriding factor in FHA loans is the ability to pay. So you will have to prove that you can afford your mortgage payments.

While your income may not be subject to a limit, the house you purchase is. The maximum home loan in most real estate markets is $271,050. However, if you live in a market that is high-priced (New York or California, for example), the limit is $729,750.

2. FHA loans are easier to get

It has actually become easier to get an FHA loan. In the past, burdensome paperwork scared off homebuyers as well as mortgage loan officers.

However, the Federal Housing Administration has now provided an automatic underwriting system. Instead of closings that are much longer than more traditional mortgages, FHA loans now take only a little bit longer close. (You can also look into “streamlined” refinancing.)

3. Appraisal process is difficult

So far, you’ve seen some of the advantages of FHA loan. There are some drawbacks, though, and one of them is the appraisal process.

Any home you want to buy with FHA-backed financing requires a government-approved appraiser, and the seller must fix any problems prior to closing. While very minor details such as missing handrails may not delay the closing, there are plenty of other issues that can make it difficult to close.

4. FHA loans might be pricier than you think

At first glance, FHA loans appear quite low-cost. However, they could end up costing more than you know. There is a 1.75% fee that you must pay up front. Additionally, you will owe a 0.5% annual insurance premium (this is on top of any private mortgage insurance you may need) for five years, and beyond that until the principal balance reaches 78% of the home’s appraised value or the sale price.

You can get help from the seller, though. Some sellers are willing to help pay part of the FHA insurance costs in order to get the deal done. Just realize that sellers can’t pay closing costs in excess of 6% of the sales price.

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