Profile picture for frsttimebuy

What are the disadvantages of an FHA loan?

My husband and I have only met with one mortgage lender so far, and they didn't even consider/explain conventional loans to us, likely because we have many debts and little to put down. We are considering FHA because even the 3.5% down will be difficult for us, but we were pre-approved based on our incomes.
  • January 03 2010 - Syracuse
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Answers (12)

Profile picture for wetdawgs
If 3.5% down payment is difficult, the 5% to 20% down payment for conventional loans will be almost impossible.  So, FHA may be your only option.

A portion of the down payment can be a gift if you have generous friends or relatives (not a loan disguised as a gift).    But, if coming up with 3.5% down is hard at this time, I am curious if you have a slush fund that makes home ownership much easier.   It always seems that something major goes belly up soon after purchase, a water heater, a furnace etc - therefore, I'd never consider buying if I didn't have a house emergency fund.
  • January 03 2010
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If you meet with a professional that doesn't give you complete information on what types of loans are available to you, then you should consider finding a professional that will answer all your questions completely. Sounds like you are new to the home buying process and doing a little more research on different types of financing and understanding it is important because you will be able to make more informed choices as a home buyer. FHA is a good way to get financing and it sounds like you may not have enough money to put down as a down payment. I would suggest to keep saving, learn more about financing, and look into the tax credit available to buyers today. A good real estate professional should be someone you can work with to help guide you through the home buying process. If I can be of assistance please email me with any further questions.
  • January 03 2010
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FHA loans have man benefits, but they also have many disadvantages.

The lender you met with probably did not spend much time talking about conventional loans because the 3.5% down payment will be hard for you to come up with.

Conventional loans currently require 5-10% down payment, sometimes 20%.

The main drawback for an FHA loan is the upfront mortgage insurance premium. FHA is going to tack on 1.75% of the loan amount on to the loan.

If you have a 20% down payment there would be no need for this and no reason to do an fha loan.

Other than that I think the FHA loan is the best loan there is. It is assumable, which conventional loans are not. And you can do a streamline refinance with FHA loans which are very cheap and simple refinance solutions to lower your interest rate in the future.

Hope this helps.

Anthony VanDyke
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  • January 03 2010
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Anthony gave a great answer.  Talk with you Realtor too and see if there are any first time home owner programs you might qualify for and whom you should speak to about them.  Here in Florida we have a  program through USDA that is 100% no down payment needed and the seller can pay closing cost.  If you can stick with mortgage officers from local banks or like Well's Fargo or Bank of America - if you interview a mortgage broker - be aware they will 'broker your loan out' and add a large fee 1-5% of the loan amount for their services, since cash is an issue - if you can save it. 
Hope this helps...
  • January 04 2010
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Profile picture for CORONA NICK
No down payment means you seem to be unable to save money.... dont bother buying a house...until you save for a decent down payment.
  • January 04 2010
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Profile picture for frsttimebuy
Thank you for all the responses.

I've looked into the USDA programs, and our combined income is too high, unfortunately. The reason we do not have any savings is because my husband just finished getting his doctoral degree, but luckily landed a great job immediately afterward. I would love to take the time to save some money before buying a house, but renting will not get us there.

Where we live, in the central NY area, there are very few places to rent and they are all very expensive (including the rental we had to take before moving here). There are many more houses for sale in a price range that would allow us to save while we were paying a mortgage. I can buy a nice, small house paying $800/month (insurance included, since that is needed), or rent a one-bedroom crappy apartment for that much, which would be too small anyway. Is this really such a bad plan? (btw, we are paying $1600/month for a house I wouldn't even considering buying)
  • January 04 2010
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Profile picture for sunnyview
FHA loans can be a bit more expensive upfront than conventional from what I had heard. I thought that FHA had a 3 year owner occupancy rule, but you would have to ask a lender about that to be sure. Many people use FHA because the down payment is lower. It is program that can help people get their first house. 

It makes me a bit nervous that you have no emergency fund at all if you buy. I do understand the graduate school lifestyle so I can sympathize. I would learn as much about your local market as possible and stick to looking at houses that are solidly in your price range to get a realistic idea about what you can truly afford. You might also wan to consider the possibility of renting a room out to help cover expenses for the first year until you settle in or even looking for a duplex to help cover expenses. Make sure that your credit is good by pulling your report, fixing any errors, reducing your credit to limit ratios etc. You also need to focus on saving. Saving up for big things can be painful, but you can do it. This is the best budget calculator that I have found here. There are also more mortgage qualification and saving calculators here that might help you run the numbers. Even if you do not increase your down payment with savings, you can still save for the unplanned homeowners emergency that often comes with ownership. 

Take a look at rents in your area. If you buy a small house, live in it for 3-5 years and keep saving, you may have the opportunity to use it as a rental if it pencils out where the rent and PITI (mortgage, taxes and insurance) are favorable. In a nutshell, learn about your market, be careful, have a plan and what ever you do please don't even consider an ARM so you can buy.  
  • January 04 2010
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Profile picture for wetdawgs
Dear Firsttimebuy:

We understand the graduate school lifestyle and money issues (been there, done that).     However, if you aren't qualified for USDA, there aren't many choices besides saving a down payment or finding generous friends/relatives to gift you a down payment.   (Yes, things have changed dramatically in the last few years (for the better in my opinion)).

If you have no down payment and no emergency fund, take a few years and come up with a plan for building both of these up.   

We purchased our first house several years after PhD completion.  Why so long?   Because that's what it took to save up the 20% down payment and an emergency fund.      We have a  very frugal lifestyle and a frugal lifestyle (living in one of those "crappy apartments" that you disdain) were critical for taking those steps. 
  • January 04 2010
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Profile picture for frsttimebuy
Thanks again. We have been living very frugally and plan to do so, whether we buy or rent because we want so badly to pay off our debts. I have no problem renting a crappy apartment...I just don't want to pay $800+ for it (and yes I know people in NYC, etc. do it all the time, but where I live is rural!). So, I'm sorry if I came off as being so "green" and unrealistic. Ultimately, we just want a place that is liveable and well within our means so that we can start saving to get what we really want, even if that is 5 or more years away. I am still looking for rentals, but I don't want to make stupid mistakes if we find a better deal through purchasing, that is why I wanted to make sure FHA loans weren't going to get us into trouble as so many other people have had trouble keeping their homes in the past year or so.
  • January 04 2010
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Profile picture for wetdawgs
How do people get in trouble and lose their homes?

a.  Over extending their budget, i.e. paying more than they can afford.

b.  Not having enough "extra" money to handle the repairs etc. that are routine.

c.  Paying too much, so when prices fall and they have to move, they owe more than the house can sell for.

d.  Losing income.   We've always bought so that we can afford the house payments if only one of is us partially employed.

e.  Having too high a debt/income ratio with other debts.

Because of the housing crisis, many lending practices are far tighter than they were a few years ago.   IMHO, this is good.
  • January 04 2010
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Profile picture for sunnyview
Pretty much everyone who is a first time buyer starts out with bunches of questions (or if they don't they should). You sound like you are trying to gather information to make the best choice and to come up with a solid plan. Homeownership can be great if you have a good realistic plan up front. I think dawgs said it just right. Too many people who had homes lost them to overstretching, underbudgeting, too much debt or an adjustable rate mortgage. When you buy you want to be a happy owner, not a sad statistic. The best way to do that is to collect information about buying, plan for ownership, make a savings plan and learn as much as you can about your local market even if you do not buy right now. All those things together will help you along with asking questions. 

HUD has the top 100 questions asked by homebuyers here that is a great online resource. This site here also has many articles related to home buying that are helpful. Keep asking questions. Zillow is a great place to get different perspectives, information and to hear others experience to help you along the way.
  • January 04 2010
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Profile picture for judyjoytomlinson
Does anyone know if you can own a rental and still get an FHA home?
  • December 29 2013
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