The Federal Housing Administration (FHA) is an agency that aims to assist hopeful future homeowners to successfully gain ownership of a property. For one, FHA loans are widespread among those who have difficulty in financing. However, any borrower must see both sides of this loan so a profitable venture could be expected in the end.
Basically, an FHA loan enables a buyer to give a small down payment upon purchasing a home. Say, he only has to pay 3 percent of the purchase price as the initial payment. Acquiring this type of loan may be helpful for current homeowners to finance remodeling a home, obtaining home repairs or home energy-efficient improvements. This could also be used to refinance current loans. This loan is also advantageous for sub-prime borrowers as there is no prepayment penalty involved.
All FHA insured mortgages are assumable, typically beneficial for sellers. For example, a financially capable buyer may claim responsibility of the seller’s mortgage. The buyer would take over the loan so the seller would be saved from scouting refinancing loans. Then again, there are certain restrictions on the assumability conditions of FHA loans. Only those mortgages that originated before December 1, 1986 are free from assumability limitations. The lender usually requires thorough report of the creditworthiness of the person (assumptor) assuming the loan. Private investors are not allowed to become assumptors of insured mortgages that were subjected to restrictions of the 1989 Act. To further learn about terms and conditions, the Housing and Urban Development online site has specific information about this matter.
Now here is the other side of the deal, there are some cases wherein this loan would not work for the home buyer’s benefit. Some sellers could not take the risk of receiving such loan. This is because the agency is not actually lending money to the buyer. Instead, the agency merely guarantees the lender to cover for the buyer in case delinquent payments occur. And processing the payment claims may take some time. Thus, there are fewer deals now that accept offers from buyers backed up with FHA loans.
Another disadvantage for the buyer is that there is a need to pay more for the private mortgage insurance (PMI) given that the down payment is much lower than conventional market rates. The situation here is that the buyer has to pay the one-time PMI fee and continue paying for monthly dues. The money saved from low down payment is then off set by the costly obligation every month.
The loan application process also poses some difficulties. There are a number of requirements the applicant has to accomplish for a limited period of time. There are also limitations on the type of housing units the loan might be used for and amount of money that could be borrowed. On the other hand, the limitations vary according to location.
So for the buyer, you firstly need to check out the application requirements and restrictions in your area. Weigh the pros and cons of getting this type of loan. The main advantage is that you could be given financial leniency. For the seller, you must screen your buyer if despite the attached FHA loan, you could still gain from the selling transaction. Or if you have this loan yourself, you need to evaluate whether the buyer is capable of assuming your mortgages.
There is no harm in trying out this type of loan. Both the buyers and sellers must take into consideration both the benefits and repercussions of acquiring such loan. In the end, both parties could look forward to satisfying deal.