Disadvantages of Buying a Home With an FHA Loan
If you have little money to make a down payment or are looking for a low interest rate, you may want to consider a loan from the Federal Housing Authority, more commonly known as an FHA loan. But before you unsubscribe, you should be aware of the potential drawbacks.
The most obvious disadvantage of an FHA loan is that you have to pay a mortgage insurance premium. This covers the FHA’s ass in case of default or foreclosure. Of course, if you mortgage less than 20% with a regular loan, you will also have to pay insurance (also known as private mortgage loan insurance). But the FHA also requires that a portion of their premium be paid up front: 1.75% of the loan base.
Also, one realtor told me that FHA loans can make checks tricky. Once you make an offer to buy a home, the inspectors will come to check it and see what you are getting yourself into. Maybe the foundation is in need of renovation. Maybe some pipes are broken. Depending on their findings, this can be costly. Since the FHA is a federal loan, you will have to deal with stricter rules. Mortgage 101 puts it this way :
… that every time you pursue government programs, you know there will be problems. You will have to follow their guidelines and rules throughout the entire process. You will be saddled with prepayment penalties and other annoyances that you might not be used to with a regular mortgage lender.
Also, some sellers do not like to deal with FHA loans. They are concerned that FHA loan buyers may be dangerous and that they will not be able to draw up a final statement that includes an income verification and an assessment of their debt situation. In a similar vein, if the seller knows the home needs improvement, they may not bother to accept the FHA loan offer because they don’t think the buyer will be able to afford the renovation.
Aside from this, some also argue that the FHA loan is bordering on predation , arguing that it encourages people to buy homes that they cannot afford and defy their obligations. However, this is really a matter of opinion. The counter-argument is this: it gives people with bad credit a chance to buy a house at a reasonable interest rate.
Overall, however, there are several disadvantages to consider when choosing between a regular loan or an FHA loan.