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How Does An FHA Loan Limit My Options
Dated: August 12 2016
If you're planning to purchase a home in the near future with a FHA loan, it's important to be aware of some limitations that may not suit your interests. FHA loans are a great way to get the capital you need to buy a home if you don't have stellar credit or a large down payment, especially as a first-time home buyer, but you may have to make a few sacrifices to achieve your home ownership dreams.
Housing prices in many markets may be higher than the lending limits allowed through FHA loans. Properties in locations with high real estate values like New York City, Washington D.C., San Francisco, and some parts Los Angeles can be approved for loans as high as $625,000, but if you live elsewhere, you'll be limited to less than half that value. This limit can severely restrict the amount of properties that are available to purchase in certain communities. If you're attempting to buy a home on a restricted budget, however, the FHA loan limitation may not have a big affect on your buying decision.
FHA loans are considered more risky for lenders than traditional loans, so the Department of Housing and Urban Development requires borrowers to take out insurance to protect lenders against default. This insurance comes in two forms: upfront mortgage insurance premiums and annual premiums. The cost of your upfront premium is easy to calculate, but your annual premium is effectively an additional fee to your monthly mortgage bill. It's likely to cost you a significant amount of money over the course of your loan.
Let's say you take out a $250,000 FHA loan for a nice single-family home in the suburbs. Your upfront MIP, with a current rate of 1.75%, will be $4,375. Your rate may be different depending on when you take out your loan., Once you pay this premium, you'll never have to worry about it again. If you took out a FHA loan in 2015, your annual premium would be 0.85%, or $2125. This would add $177 to your mortgage every month.
Since FHA loans are managed by HUD, there are certain conditions that properties must meet to qualify for purchase by FHA borrowers. These conditioners are checked by HUD-approved appraisers before a loan can be approved. The appraisers are responsible for coming up with a value for the property and checking to see that the building meets all applicable health and safety standards. If you want to purchase a fixer upper, you may not be able to do so with an FHA loan. A HUD appraiser will:
Check for health and safety hazards like mold, radon, and exposed lead paint and asbestos
Make sure lot is graded to avoid moisture affecting foundation
Make sure all bedrooms have an egress point, like a window
Check for a functional heating system
Make sure roof and foundation are in good condition
There are, however, over zealous professionals in all occupations, and an appraiser may spoil a sale for you if they find minor problems with a property that would normally go unnoticed.
While perhaps undeserved, borrowers taking advantage of FHA loans may be seen by sellers as being more of a hassle than traditional borrowers. The main reason for this, as discussed above, is the appraisal process. Many real estate agents will avoid taking offers from FHA borrowers altogether if there are plenty of buyers on the market just to prevent HUD officials from coming to the property. As an FHA borrower, you may be limited to the amount of properties that will consider selling to you.
While there are downsides to FHA loans, there are also a wide range of benefits. In fact, all types of loans have drawbacks, and FHA loans may be the best option for you when your financial situation isn't ideal no matter what downsides may exist. When making any kind of real estate decision, you should gather as much information as possible before signing the dotted line.
For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 30 years in the industry, Mark has gained experience in ....
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