One very popular loan option available in the country is the FHA loan. This is offered by the private lenders and these are guaranteed by the Federal Housing Administration (FHA). Since these loans are guaranteed by the Federal Authority, the rate of interest on this loan is relatively low than the rate of interest in a conventional loan. The down payment and the credit score required to get approved for this loan are also relatively relaxed than the conventional mortgages. Given these, this is particularly suitable for many home buyers with certain profile. In the absence of this special type of mortgage offer, many of you would have been forced to bank upon the predatory lenders. Anyways, this type of government-backed offer is not suitable for all. It has its share of drawbacks too. Here we discuss about some of its drawbacks.
1. Comparatively less loan amount
The amount that you can obtain in the form of FHA loan is comparatively low. This does not allow you to obtain as much loan that you require so as to fulfill your dream of owning your home. Conforming mortgage offers which are backed by Freddie Mac and Fannie Mae help you get a much higher offer. Amount of Federal Housing Administration mortgage offer varies with the area where you are located. In high cost areas, this amount is much higher, whereas in low cost areas, this amount is lower.
2. Established is credit history is required
In order to get approved for an FHA loan, you should have an established credit history. Though you are not required to have a perfect credit, but you should have some credit history, in order to get approved for an FHA offer. If you don’t have any credit history, you should start building credit right now.
3. Choices are less for you
FHA loans are not for all. These are aimed at catering to the certain segment of the home buyers. Basically the major goal of this mortgage offer is to attain home ownership goal for the long run. These are very conservative mortgage offers too as the chances of making losses by the lenders are much less. These loans are not available in wide-ranging varieties. Usually, these mortgages are of fixed rate. Generally, you won’t get loans of adjustable rate type. An FHA loan may not fit your bill but it may be very much suitable for another borrower.
4. Rigidity in regard to mortgage insurance
The FHA loan is too rigid in terms of mortgage insurance. Here you have to pay the private mortgage insurance. You have to pay the fees upfront as well as the monthly fees. You have to continue making private mortgage insurance for 5 years for this. This you will have to do so even if you have acquired 20% equity in your home.
Despite these limitations, FHA loans are particularly suitable for a special category of home buyers. Due to comparatively down payment and credit score requirements, these loans are very much suitable for the first time home buyers.