7 Myths about FHA Loans Debunked
Homeownership is a staple of the American Dream. The housing market is a pillar of our economy. So why is it, then, that so many Americans don’t own homes?
It’s a classic conundrum. Buying a home is one of the smartest financial investments a person can make, but a home is far and away the most expensive thing most people will ever buy.
Many Americans aren’t able to save up enough for a down payment, and many worry that the financial process is too daunting to overcome for anyone without an accounting degree.
Luckily, there’s a solution: the Federal Housing Administration (FHA) loan. You may have heard of it.
FHA loans are part of a program to help those with low or moderate incomes, no credit, bad credit, a bankruptcy in their history, etc. get a home loan. The program ensures that borrowers are able to take out a loan with easier credit score limitations and a significantly lower down payment.
…But is this too good to be true?
It’s not too good to be true. There’s no “catch” behind FHA loans. The FHA is a government agency whose goal is to assist Americans in buying new homes, there is no secret ulterior motive.
However, like any government program, there are pros and cons. The program is complicated. There’s a lot of information out there, as well as a lot of misinformation, and you need to be able to distinguish between what’s real and what’s false.
Mike Wise, a mortgage broker in Thousand Oaks, CA and founder of Capstone direct who specializes in FHA loans and its benefits, gave some expert insight. Here’s the truth behind seven common myths about FHA loans…
1. MYTH : Your low credit score will hurt you.
Actually, someone with a low credit score or no credit score at all is who will benefit from this program. Recovering credit is not as daunting a task as some think, and it doesn’t necessarily take as long as you might expect. Simply paying your bills on time and proving you can pay down debt over time will get your credit score up to the necessary 580 in no time.
If you have no credit score, the FHA loan may be the lifeline you’re looking for. Talk to a professional mortgage lender about your status and a variety of solutions will be presented.
2. MYTH : You need a bigger down payment than before.
This is only true in the sense that the down payment minimum was raised a few years ago from 3.0% to 3.5%. This is still drastically lower than 10% or 20% that conventional loans require.
This means that for a $200,000 home, you would need to have at least $7,000 saved up.
That may sound like a big number, but think of it this way: mortgage payments on that loan would have be around $1,074 per month. Add in the monthly mortgage insurance premiums and it’s somewhere around $2,110. If you can afford this loan, then it’ll only take you four months to save up for the down payment.
3. MYTH : You have to get a single-family house.
This myth stems from simple confusion. The truth is that FHA loans are indeed available for single-family house loans as well as for condos or multi-family homes for up to four families.
Here is the only catch: FHA must be owner-occupied. You can’t get an FHA loan for a single-family investment property. For a single-family home, you have to be the primary resident. You can’t use FHA loans to buy a house you intent to use as a rental property, guest house or vacation home. For a multi-family home, you still have to live in one of the units.
4. MYTH: You can’t use it for home improvements.
FHA loans can indeed be used for upgrades, repairs, and alterations. A Section 203(k) loan enables borrowers to consolidate the cost of upgrades and improvements into a single mortgage.
According to HUD’s website a single-family residence is eligible for up to $25,000 for up to 20 years for home improvements. Multiple-unit dwellings are eligible for up to $60,000 in repairs and enhancements, limitied to $12,000 per unit and with a maximum term of 15 years.
Investment properties are not eligible; use of an FHA loan for home improvements is limited to owner-occupied homes. This particular loan also requires that at least $5,000 of the total loan be spent on actual rehabilitation of the property.
There are two types of Section 203(k) loans, so speak to your lender about which would be most appropriate for you.
5. MYTH : You can’t apply if you’ve bought a house before.
First-time status is not a requirement for FHA loan eligibility. However, it still applies that you must occupy the property you buy.
You can technically get a second FHA loan as well. If you’re looking to move after already having used an FHA loan to buy your first property, you can use it again for the second. However, any good lender would advise against, because the higher monthly insurance premium would still apply and you can’t cancel that premium, unlike with a conventional loan. And if you’ve got a property to begin with, then chances are you’ll be able to make a higher down payment and avoid the FHA loan route.
6. MYTH : You’ll be rejected if you’ve declared bankruptcy.
Bankruptcy is not a deal-breaker. Certainly it makes many things in life harder, and applying for a home loan is one of them, but speak to your lender and you’ll see there are still a variety of options for you.
FHA rules do allow lenders to consider your loan application, even if you’re still paying on a Chapter 13 bankruptcy, but you must have been making payments on time (and verified) for at least one year (12 months). You will also still need the court trustee’s written approval to apply.
7. MYTH: You can only get an FHA loan through your bank.
The FHA does not give out the loans; the FHA ensures certain conditions for acquiring a home loan.
This means that while the FHA itself won’t give you a loan, you are not obligated to stay with your bank. Other banks and mortgage lenders are available to you.
Often, a third party mortgage broker is the best route to take. They may have more expertise and experience than a young bank employee. The most important thing will be to talk to an actual professional.
There are many factors that play into choosing a lender, but it never hurts to talk and get some questions answered. Searching the internet is a good way to find someone to talk to, but there’s no substitute for actual interpersonal Q&A.