Though FHA Loans now represent more than 30% of mortgages, there are still a lot of misconceptions that both real estate agents and the borrowers have about this program. All the myths that I have listed below have been raised to me numerous times. I finally decided to post a blog on this so that I can clarify this to a much larger audience.
1. It takes longer to close an FHA Loan– Towards the 2nd half of last year when FHA loans started exploding, most of the lenders were caught off guard. They did not have enough trained underwriters to take decisions on the loans that were being sent their way. That resulted in longer turn times for FHA loans. Within months, lenders realized that this was soon becoming the fastest mortgage product on the block. Since then they have staffed themselves adequately on the FHA underwriting side and hence it’s not atypical anymore for FHA loans to close in 30 days or less.
2. Interest Rates are higher – While interests rates are situation specific and can potentially change multiple times just in a day, FHA loans are usually priced the same as conventional. Sometimes they could be cheaper while at other times they could be slightly expensive.
3. Closing Cost is higher – FHA charges 1.75% up front Mortgage Insurance as closing cost. That could make you think that you will have to bring that extra 1.75% to closing table. While that 1.75% is considered a closing cost, it’s added to the loan amount, e.g. if your base loan amount was $400,000, your final loan amount actually becomes $407,000. As you can see FHA loans do not increase the amount of closing cost that you need to bring at closing.
4. Income Limits to Qualify – To qualify for FHA loans there are absolutely no house hold income limits. Meaning you could be making $1 million a year (or more) and could still be eligible for an FHA loan.
5. Can’t sell/refinance quickly– FHA loans just like most of the conventional loans have no Pre-payment Penalty. What that means is you can sell your house or refinance anytime you wish to after closing the transaction.
6. Appraisal Requirements are tougher -In December 2005, FHA made a number of changes to appraisal guidelines allowing for “As-Is” appraisals even if minor defects to the property conditions exist. FHA appraisals now only require repairs for conditions that rise above cosmetic defects, minor defects, or normal wear and tear. Mostly, the appraisal requirements now resemble that of Conventional mortgages.