From Justin Pritchard,
Your Guide to Banking / Loans.
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FHA home loans are not perfect for all borrowers. Of course, they make home ownership a reality for a number of buyers. In fact, they’re the perfect choice for buyers with a certain profile – who might otherwise be forced to rely on predatory lenders. However, FHA home loans have some drawbacks that you just need to be aware of.

• Basics of FHA Home Loans

Lower Loan Amounts

FHA home loans have relatively low limits. In other words, you can’t borrow as much as you might need to borrow for the home of your dreams. FHA home loans allow you to borrow less than you might get from conforming loans under Freddie Mac or Fannie Mae. Depending on whether your area is considered a “high cost” or “low cost” region, the amount can be much less.

Credit Needed

You need to have established credit to get an FHA home loan. You don’t need to have perfect credit, but you should have at least some history for them to look at. If you have no credit history, start building credit now. Keep in mind, they may allow you to get an FHA home loan even without any history – ask your broker for details.

Mortgage Insurance

FHA home loans have a rigid mortgage insurance structure. While you may have to pay private mortgage insurance (PMI) anyway, the FHA structure might not be ideal for you. You’ll pay 1.5% up front, and you’ll pay a 0.5% annually (paid monthly). You must pay this insurance premium on your FHA home loan for 5 years – even if you build sufficient equity in your home.

Limited Options

FHA home loans don’t come in as many varieties as non-FHA loans. They are designed to serve a basic need for a defined segment of buyers: long-term home ownership. They are mostly conservative loans that will be less likely to lead to lender losses. Therefore, you can’t find loans like option ARMs. Of course, these loans can lead to negative amortization (where you owe more at the end of the month than you did at the beginning). You may be better off without these creative loans, but they are a good fit for some borrowers.

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