My last blog was about all the benefits of using the FHA loan programs. I painted a pretty picture of the perfect loan program for the Bay Area borrower with little down payment and less than perfect credit scores. Like any loan program, there are some cons to consider before you decide that an FHA loan is the best loan for you and your goals.
FHA requires a borrower to pay 1.5% of the loan amount upfront to the fund that insures FHA loans. For example, on a $500,000 loan, the borrower would have to pay $7,500 upfront. I know you’re thinking, the reason I need an FHA loan is because I do not have a lot of upfront money to put towards my home purchase. The good news is you can alleviate some or all of this upfront cost. The 1.5% can be financed into your loan amount without affecting your loan to value ratio. The upfront cost can also be paid with any seller contributions your real estate agent negotiates on your behalf (up to 6% of the purchase price).
On top of this 1.5% upfront cost, you will also be required to pay 0.5% per year towards the FHA’s insurance fund, which is charged to you monthly. For example, on a $500,000 loan, you will be paying $208.33 per month. On a positive note, the 0.5% per year replaces private mortgage insurance which borrowers usually must pay when they borrow more than 80% of a home’s value and 0.5% is usually cheaper than paying private mortgage insurance.
Another downside to the FHA’s loan programs is with condos. The FHA will loan money on a condo, but they have very tight guidelines. First, the condominium complex must be HUD approved. There are only a handful of HUD approved complexes in San Mateo and San Francisco County. Follow the link to see which complexes are eligible in your city. Some of the other guidelines are:
- At least 90% of the complex must be sold
- At least 51% of the complex must be owner occupied
- For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
- Condominium projects consisting of 30 units or less can have up to 20% of the units encumbered by FHA insured mortgages.
Also note the new loan limits for the Bay Area are only in effect until December 31, 2008. Time is of the essence if you want to take advantage of what FHA has to offer. As you can see, an FHA loan is not for everyone. But for that Bay Area borrower with little down payment and less than perfect credit, it may be the best option for you. The best advice I can offer is to sit down with me or your local mortgage professional to work out a side by side comparison of FHA compared with other loan programs.
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