When you get ready to buy a house, everyone wants to give you advice. Old Uncle Billy wants to tell you about buying a house in the 1970s at 12% interest, and your neighbor feels compelled to tell you about every step of her loan process. One type of loan that people always spread misconceptions about is FHA.
On Q Financial is here to sort out the myths from the facts about FHA loans. Below we discuss nine myths about FHA loans and give you the real story, so you’re equipped to make the best decision about your home mortgage.
Myth #1: FHA loans require the same down payment as conventional loans.
False! The minimum required down payment on most conventional loans is 5%, but there are other programs that will allow 3% down with restrictions. FHA-approved lenders usually offer loans with as little as 3.5% down for one to two unit properties. FHA borrowers are allowed to use gift funds for down payment, as well as grants from state or local government down-payment assistance programs.
Myth #2: FHA home loans usually have the same interest rates as conventional loans.
Incorrect! While all loans are subject to negotiation with the lender, FHA loans generally come with lower interest rates.
Myth #3: FHA loans are harder to qualify for.
Quite the contrary! FHA loans are actually less restrictive, so many people qualify somewhat easily. The intent behind FHA loans is to give borrowers (including first time homebuyers) with lower credit scores and/or limited down payment funds an opportunity to purchase homes.
Myth #4: FHA loans are only for single family homes.
Negative! FHA loans can be used to purchase single family homes, 1-4 family homes, condos and modular homes, and double wide manufactured homes.
Myth #5: An FHA loan can only cover the value of the house.
Nope! If your house-to-be is a fixer upper, you can finance home improvements of up to $25,000 through your FHA loan. This kind of loan is called a 203k (which is a Title I loan), and only certain FHA-approved lenders can issue one.
Myth #6: All FHA-approved lenders offer the same loan terms.
Not so! Not every FHA-insured loan package is the same, meaning you should shop around for the best offer.
Myth #7: FHA loans have standard closing costs.
Bogus! Well, somewhat bogus. There are some unavoidable costs associated with closing on a house like appraisal fees, inspections, etc. However, your FHA-approved lender may be able to negotiate for lower closing costs on your FHA loan.
Myth #8: My FHA loan doesn’t need insurance.
Inaccurate! There are two kinds of insurance that must be held on all FHA loans. There is an upfront premium paid on the loan amount. This can be financed as part of the loan. Then there is an annual premium, paid in monthly installments by the buyer.
Myth #9: FHA loans are really for first time homebuyers.
Phony! FHA loans are a great resource for first time home buyers, those with lower credit scores or a bankruptcy in their past, and others who are having a hard time qualifying for a conventional loan. FHA loans can also be used by disaster victims via the FHA Mortgage for Disaster Victims Program. This great program provides 100% financing through approved lenders for the reconstruction or purchase of homes after they were severely damaged in a disaster.