Lenders make loans and FHA Insures the loan.
4 years ago, it was possible to get a VARIABLE INTEREST RATE LOAN from most lenders.
FHA insuring that loan is no replection upon FHA.
Your friend had the opportunity to read the loan, to look at the GFE, (good faith estimate) and make his own decision.
You also have the opportunity to say NO, to any loan.
Fha loans are just as safe as conventional, if not more. Your friend got a bad deal but not because it was an FHA loan, it was because of some other factor. It may have been that it was an "adjustable" interest rate, which can be on and FHA or a conventional. It may have been some other reason. But FHA loans don't just "go up" for no reason and they don't go up at all if you get a fiixed interest rate. BTW, anything that COULD go up on your loan must be disclosed up front so you know what might happen later.
Here are the cost consideration broken out when taking a FHA:
1) Upfront PMI is 1.7% (rates change frequently) of the principal amount of the loan. There is no upfront fee for PMI on conventional loans. This is several thousand dollars that is lost immediately and is added to the balance of the loan.
2) Monthly PMI is about 1.4% (rate change frequently) divided by 12. The PMI for conventional loans is about half as much. In fact, this is the reason that the monthly payment for the FHA loan is actually higher than if you had a conventional loan.
3) As of June 2013, the PMI for the FHA loan is now for the life of the loan. This was the biggest deal breaker for me and anyone considering this loan. This can cost you between $100-200k over the life of the loan.
4) If you refinance out of the FHA loan, the upfront PMI is not refundable.
5) If you refinance out fo the FHA loan, you have to pay the entire month of interest no matter when the new loan closes. This forces you to close on the new loan at the end of the month. Conventional loans prorate your interest when you refinance.
DO NOT USE THESE LOANS. Save an extra 1.5% to get a downpayment of 5% instead of the FHA minimum of 3.5%..
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