FHA or the Federal Housing Administration was established in 1934 to provide an adequate home financing system through the insurance of mortgages, according to FHAloan.com. FHA loans are a type of loan product insured by the Federal government and it is used for people who are first-time homebuyers, have little money for a down payment, and have less than perfect credit, according to the Federal Housing Administration. FHA offers fixed-rate and adjustable rate loans, as well as rehabilitation loans used for repair of a property and loans for Indian reservation and other restricted land purchases. Although FHA loans are beneficial in many ways, they do have several disadvantages.
Loan Amount
FHA mortgages provide relatively low lending amounts as compared to other types of conventional mortgage loans, according to FinancialPlanningAdvices.com. The lending limits of FHA loans depend upon what part of the country you live in and if your loan is a high or low cost loan, meaning the FHA loan limit is based on a formula according to the median home price in your area.
Mortgage Insurance
FHA loans are insured loans and therefore require mortgage insurance, a policy that protects lenders against most losses if the home owner defaults on their loan, according to FHAloan.com. Mortgage insurance is required for people putting less than 20 percent down on their home loan. FHA charges an upfront mortgage premium upon inception of the loan and a yearly percentage of the loan amount thereafter.
Limited Choice
FHA does not provide a wide variety of choices in the types of mortgages offered, as opposed to conventional loan products. FinancialPlanningAdvices.com states that FHA loans are conservative loans geared towards long-term home ownership, serving a particular group of people. FHA loan products are restrictive and do not offer creative financing like conventional loan products.
Minimum Property Standards
FHA mortgage loans require that the property purchased meets minimum property standards, making sure that the home was built using products and materials that meet certain standards, according to HudUser.org. FHA requires that a home meet certain requirements providing a safe, sanitary, and decent home, meeting building code regulations. If a home is in disrepair, FHA may not approve the loan and means that the property is uninsurable, especially if the property needs significant repairs.
Member Comments