FHA loan is Federal Housing Administration is a governing body which promotes people to buy houses.In other words, FHA is nothing but mortgages obtained by FHA’s help.
This program was started in 1930’s during the infamous Great Depression where there was a sharp rise in defaulters. Hence to serve as insurance the project was introduced.
Though the program was introduced and run by Federal government there are many advantages as well as some flaws in this project.
PRO’s-
- One of the key advantages of FHA loans are they can be accessed to almost anyone.
- Another key aspect of FHA loan is that the down payment as low as 3 %.Hence FHA loans are very attractive to people buying houses due to this key feature.
- An FHA loan may be taken over by another person, i.e. a person interested in buying a home is given the liberty to take over the mortgage of the seller.
- There is no prepayment penalty clause.
- There is a possibility of slight relaxation or leniency in financial crisis.
- If in case the borrower fails to pay the lender then it is the FHA who assures to pay the money to the lender.
- There is an upfront mortgage insurance premium which the buyer has to pay each month which is around 1.5%.It is this amount which FHA pays to the lender in case the buyer defaults on FHA loan.
- Due to the insurance, there is a sense of security among lenders
- The interest rate in case of FHA loans is very less as compared to regular conventional loans.
CON’s-
- Although, it is said that FHA loan is for everyone there is other side of the coin too and you may find that its not for you for the very reason that if you need a large mortgage an FHA loan may not offer you that much of required money.
- Another disadvantage of FHA loan is that you cannot buy a home of your choice in a high cost region because FHA loan might not fetch you that much sum.
- For getting FHA loan one has to have a credit history without which there is least possibility of getting a FHA loan. If one doesn’t have credit history then he has to build it which can be troublesome. This is done so as to see how the borrower responds to credit building and whether he is creditworthy or not.
- Since, the FHA is insured by the Federal Housing Administration which is a government organization, hence there are comparatively many formalities to be fulfilled and the paperwork required is more.
