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Is A FHA Loan A Good Idea?

The FHA loan has certain features that make it ideal for some home buyers. The FHA loan is not a first time home buyer loan, but its features are ideal suited for them.

FHA Allows Higher Debt Ratios Than Conventional

For buyers with higher consumer debts or a more modest income, FHA allows them to purchase more home because it will allow higher debt ratios. This means many first time home buyers can purchase more house than they could with a Conventional loan.

FHA Allows Less Than Perfect Credit

If your credit scores are less than 700, a FHA loan may be a better option. FHA is more forgiving than Conventional on less than perfect credit. Buyers with lower credit scores will get a better rate with a FHA loan, and, depending on the score, FHA may be the only option for some buyers.

FHA Has a Shorter Wait Time After A Major Derogatory On Credit

If you have had a bankruptcy or foreclosure on your credit history FHA will allow you to purchase a home sooner than a Conventional loan. FHA requires two years to have passed since the discharge of a Chapter 7 bankruptcy and three years to have passed since the completion of a foreclosure. For Conventional it is 7 years for both. It is important to remember that the clock starts on a bankruptcy from the discharge date and on a foreclosure it is the date the bank takes ownership of the property.

What Are The Disadvantages Of FHA?

Though the rate is usually lower on a FHA than a Conventional loan, the mortgage insurance on a FHA is usually higher. Unlike Conventional, FHA’s mortgage insurance does not drop off after you have 20% equity in the property.

FHA is also more strict on the appraisal. A FHA appraiser is looking for safety issues on a home as well as looking at value. If there is chipping paint (and the house was built before 1972), exposed wire, broken windows, missing railing, or cracked cement that could be tripping hazard the FHA appraiser may require these to be fixed before closing. This  might make sellers more likely to consider other non-FHA offers if they are available.

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