In 1934 the Federal Housing Administration (FHA) was created as a function of the National Housing Act of that same year. Its mission was to help increase home construction, reduce unemployment, and operate and back various loan programs. Though there have been many changes to the administration through the years, today it stands as an insurer of FHA mortgages, which allow potential homeowners more affordable access to housing. Though there are a variety of reasons one may choose FHA financing over conventional Fannie Mae and Freddie Mac backed loans, the most common tend to be the more relaxed credit standards and lower down payment that the program affords. Here are the basic FHA loan pros and cons.
FHA Loan Pros and Cons
Advantages of an FHA Mortgage
- 3.5% allowable down payment
- Lower monthly MI payments even at lower credit levels
- More forgiving standards for credit qualifying
- An entire down payment can be a gift from a family member
- More liberal debt to income ratios for lower-income borrowers
- Seller concessions can equate to up to 6% of the loan amount (vs. 3% conventional for lower down payments)
- Rates in many cases competitive with standard conventional mortgages
Disadvantages of an FHA mortgage
- Up Front Mortgage Insurance Premium of 1.75% of the loan amount due at closing (Premium can be wrapped into the mortgage, however, it still means reduced equity)
- Down payments of less than 10% require lifetime monthly mortgage insurance. The only way to eliminate is to pay off the mortgage, refinance to a conventional mortgage or sell the home. (10% or more down requires a minimum of 11 years)
- Many lenders will charge a higher rate for FHA loans since they feel is less likely to shop
- Only available for primary residences. (2nd homes or investment properties not eligible)
- FHA is a little more stringent with its review of appraisals regarding the condition of the house. Whereas conventional financing is primarily worried about health and safety issues,
- FHA tends to pay a little more attention to condition for items such as:
- Must have an undamaged exterior, foundation, and roof
- Must have safe and reasonable property access
- Must not contain loose wiring and exposed electrical systems
- Must be free from damaged underground storage tanks and soil contaminant
- Must have a working, permanent heating system that can heat the property adequately
- Must have surfaces free of chipping or peeling lead-based paint
- Must have adequate access to attic spaces and natural ventilation in crawl spaces
- Must have access to clean water
- Must be free from wood-destroying insect infestations
- Must have working utilities, such as water and heat
- Must not have interior and exterior health and safety hazards, such as no handrails on steep staircases
- Must be a marketable property
If these items are not agreed to be repaired prior to closing, the FHA will not insure the mortgage and it can kill a transaction.
Get customized FHA rates
Though it is not a catch-all solution, depending on the circumstances, FHA can help NJ home buyers access homes that they may not otherwise be able to qualify for. Consult your mortgage representative on whether an FHA mortgage may be the right solution for you.
