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Disadvantages to FHA loans


Disadvantages to FHA loans.

For years FHA or Federal Housing Administration, loans have been the go to product for borrowers who don’t have a lot of cash for a down payment. They require a 3.5% down payment and are probably one of the more common loans out there. According to some, Disadvantages to FHA loans.however, they may be some of the more predatory and abusive loans on the market. In a new article by the New York Times, Edward J Pinto, a resident fellow of the American Enterprise Institute, claims that the majority of FHA loans are at high risk for default and for the economy tip back into recession. Borrowers may have no way of knowing how safe their loans are because the agency prices all the loans the same. Many homeowners think that the government is protecting their interests when in fact the borrower who has a very low risk loan doesn’t even know that he might be better off going through the private sector with a conventional loan backed by Fannie Mae or Freddie Mac.

Many homebuyers simply look at the basic numbers of the initial cost of the loan rather than long-term. The difference in premium can be considerable. According to the article an example of $”300,000 with 5% down, the FHA would charge an upfront insurance premium of 1.74% or $5250 financed into the loan. The premium would also add $325 a month; if the borrower put down only 3.5%, the premium would be $337.50. In contrast, the same loan with 5% down and a private mortgage insurance would not charge an upfront fee; the monthly premium would only be $175.” That additional monthly payment can make or break a homebuyer and can add up to a lot over time.

It really comes down to the lender. Smart lenders, experienced lenders may steer home buyers away from costly FHA loans and recommend that buyers with decent credit ask the seller to pay the closing so that home buyers can bring more to the down payment.

If borrowers can put down at least 5% and have a credit score of about 740. Their monthly payments and half amounts will be much lower and their protection much greater.


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