Financing in Jersey City>Question Details

Tyler, Home Buyer in New York, NY

What are the disadvantages on an FHA loan?

Asked by Tyler, New York, NY Sat Apr 4, 2009

I have been getting advice to check out FHA loans. I am a first time buyer looking to purchase a multi-family home in Hudson County New Jersey. (Jersey City) I am willing to live at the property, but cant afford the 20% most banks are requiring for the size of the loan which is around 600K. I have excellent credit and no debt. I understand there is something called a funding fee associated with this loan. I last heard that the funding fee is 1 3/4 % which is taken from the balance of the loan after your down payment. Then this amount is added to the total borrowed amount and spread over the term of the loan. Besides the funding fee what other things should I look out for with this type of loan?

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The main drawback for an FHA loan is the upfront mortgage insurance premium. FHA is going to tack on 1.75% of the loan amount on to the loan.

If you have a 20% down payment there would be no need for this and no reason to do an fha loan.

Other than that I think the FHA loan is the best loan there is. It is assumable, which conventional loans are not. And you can do a streamline refinance with FHA loans which are very cheap and simple refinance solutions to lower your interest rate in the future.

FHA loan limits:
https://entp.hud.gov/idapp/html/hicost1.cfm
http://fhamortgageinfo.com/
3 votes Thank Flag Link Wed Jul 22, 2015
Tyler,
What you are referring to is called the UpFront Mortgage Insurance Premium or UFMIP. This is essentially Mortgage Insurance (like PMI) in a lump some financed into the loan, and the rest of the MI is colelcted monthly, leaving the monthly amount lower than the Fannie Mae rate, especially with small down payments.

There are VERY FEW disadvantages to FHA these days compared to Fannie Mae products -- about the only one I can think of is that you have to pay mortgage insurance on all FHA loans nomatter what your down payment -- but in today's environment it is a small price to pay for a loan you simply can't get elsewhere.

However, while FHA is wonderfully flexible in some respects (100 percent gift allowed even with 3.5 percent down etc etc) there are a couple of weird restrictions and constraints, especially when it comes to 3 or 4 unit homes. Plus, FHA won't finance condos in projects with less than 4 units and the association must be turned over for a year (which doesn't affect you because you are buying a multifamily) homes. Not going to write a thesis about it here. Email me privately if you want to go over details.

Bottom line is there is a huge amount of misinformation about FHA since until recently most mortgage reps and Realtors had not made use of it. So you should go to a lender that is "direct endorsed" with FHA and deal with people who have been doing this for years. And don't be hoodwinked into paying more -- no need to pay points or origination fees.

The FHA loan limits are essentially the same as Fannie Mae in Hudson County and most of NJ. The "regular" limits go to $417,000 for a one family or condo. But there is the "Mini Jumbo" expanded loan limit which, in Hudson County and most areas of NJ, is over $700,000 for single family homes and over a million for 4-family houses.

Ruth Bonapace
ruthbonapace@gmail.com
3 votes Thank Flag Link Sat Apr 4, 2009
There are loan limits. I beleive most of New Jersey is $417,000 but you need a reputible mortgage office not a realtor.
Web Reference: http://Ask4Greg.com
1 vote Thank Flag Link Sat Apr 4, 2009
FHA loans in essence are the new sub-prime product. They allow you to buy a home with as little as 3.5% down and to have a much lower credit score. The major disadvantage is cost. You will typically pay a higher interest rate. You will also have to pay mortgage insurance, in both the form of an upfront premium and in the form of monthly premium.

While may people will also argue that appraisal are stricter and that FHA loans take longer to close, that is really not the case anymore.

Andres Garcia
Sales Associate
RE/MAX Gold Coast Realty
56 Newark Street
Hoboken, NJ 07030
Direct: 201 795-5200 x340
Office: 201 795-0100
Fax: 201 795-1245
andres@milesquarerealty.com
http://www.milesquarerealty.com
1 vote Thank Flag Link Sat Apr 4, 2009
Hi Tyler,

Great Question.

The following are some of the Disadvantages of FHA Loans:

Mortgage Insurance

Every FHA loan requires an upfront mortgage insurance payment equal to 1.75% of the loan amount. This can be rolled into the loan if you choose to avoid the out of pocket expense. In addition, you will have to pay for an annual mortgage insurance premium on a monthly basis.

The FHA annual mortgage insurance premium on loans with terms of 15 years or more will range from 0.80% to 1.05% of the loan amount (depending on the loan to value ratio). For loan terms of 15 years or less, the FHA annual mortgage insurance premium can range from 0.45% to 0.95% of the loan amount (depending on the loan to value ratio).

Limited Loan Amounts

The maximum mortgage amount financed with FHA will depend on the State and County the home is located. Visit the U.S. Department of Housing and Urban Development (HUD) website to search for FHA mortgage limits in your area.

Limited Occupancy Types

FHA Loans are only available for owner occupied properties used as your primary residence. This means you cannot attain an FHA loan for a second property, investment property or vacation property.

I've written an article called "What is a FHA Loan?" that I believe you will find very useful for your questions and concerns. https://www.besmartee.com/blog/what-is-a-fha-loan

I hope this helps!

Cheers
0 votes Thank Flag Link Fri Jul 24, 2015
Here are the FHA loan limits for Hudson County: https://entp.hud.gov/idapp/html/hicost1.cfm

FHA loans are not the 'new" subprime loans, and most lenders now require a minimum 620 credit score for financing. FHA does require the UFMIP of 1.75% and monthly MI of .55%. Keep in mind, FHA does not impose the Fannie Mae point adjustments for credit and/or multi-family properties.

In my opinion, FHA is the way to go for an owner-occupied multi-family home purchase, with less than a 20% down payment. FHA does want to see at least 3 months reserves(funds after closing) for an FHA 3-4 family purchase. FHA appraisal guidelines have eased in recent years; many real estate agents still remember the old days of having many repairs noted on a property prior to closing.(Which benefits the consumer, btw)

Good Luck!

Michael Byrne
http://www.refi-fhasecure.com/
0 votes Thank Flag Link Sat Apr 4, 2009
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