Want to be a homeowner with only a small down payment to begin with? You’re probably considering FHA loans then. They are a popular option in this regard, with relatively relaxed requirements for home loans. A great option they may be, but FHA loans are certainly not for everyone; a fact that most are unaware of. Take a look at the following FHA loan pitfalls to be aware of.
Even though it’s okay to expect some leniency with the FHA when applying for a loan, you should have an established credit history; something that they can refer to. If you are considering the loan because a perfect credit seems to be way out of your league, you should at least build some credit (a minimum of 620 is required) now to be deemed a suitable candidate. The number one among these FHA loan pitfalls is to not build credit at all.
Unlike conventional loans, FHA home loans usually come with low limits. That is, there’s a set amount that you can borrow only; this might very well be less than what you may need to buy the home of your dreams. This is further influenced by the location where the property is going to be. For instance, if it’s a low-cost area, the amount you may get approved for is going to be lesser. The key is to not expect too much in terms of the loan amount you can be approved for.
(READ: First Time Home Buyer Mistakes)
The structure for mortgage insurance is a major reason why some people are led to believing that FHA loans can cost them much less than other competitive loans. However, it’s rigid and if one look at it closely. You’ll have two types of insurance premiums: an upfront premium and an annual premium. While the former is paid upon closing the deal, the latter is added to the mortgage payment, influenced by your loan to value ratio, the duration of the loan until repayment, and the size of the loan. Getting a loan (any type of loan) requires some assurance that you could be able to pay off that loan.
The loan requires the property to meet minimum standards when being evaluated by an FHA-approved appraiser. If it won’t, the individual who owns the property at present would have to pay to improve the property to meet the conditions. Another alternative is for the borrower to take over and repair it before so that their mortgage application is approved.
Second, there is no definite income limit for the borrowers, but you do need to prove that you’ll be able to repay it.
These ‘strict standards’ vary with respective lenders. If you have trouble with one of them, maybe another FHA approved lender will be more willing to approve it. But don’t assume anything, whether it’s about not being qualified enough or even about having better luck with different lenders, unless you’ve talked and confirmed with them in the first place.
With FHA loans, you might not be offered as many options as standard, non-FHA loans in their different varieties might be providing. In that case, you’d find the FHA loans as a conservative one to come by. But they do aim for long-term home ownership for individuals who’d otherwise face a hard time securing it. All you need is to avoid these FHA loan pitfalls when planning for a smooth application process.