FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
Loan-to-value ratio (LTV): The maximum LTV for an FHA cash-out refinance loan is 80%. 3 That means the amount you owe on your existing mortgage cannot exceed 80% of the home's current value.
You may be denied for an FHA loan if you have declared bankruptcy but you have not had the bankruptcy discharged. You may be denied if you are delinquent on federal taxes or otherwise owe money to the federal government but without an approved payment plan.
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
FHA First Mortgage
Borrower must have owned property for 12 months AND if encumbered by a mortgage made payments for the last 12 months within the month due. Otherwise limited to 85% LTV. Standard 31/43 ratios, may be exceeded with compensating factor(s).
Credit Scores
According to FHA guidelines, applicants must have a minimum credit score of 580 to qualify for an FHA cash-out refinance. Most FHA insured lenders, however, set their own limits higher to include a minimum score of 600 - 620, since cash-out refinancing is more carefully approved than even a home purchase.
Gross-Up Factor: 25%
For Social Security income (i.e., retirement income, disability benefits, survivor benefits and Supplemental Security Income), the Seller may gross up 15% of the income without obtaining additional documentation. This nontaxable income may then be grossed-up and added to qualifying income.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
The house you can afford on a $70,000 income will likely be between $290,000 to $360,000. However, your home-buying budget depends on quite a few financial factors — not just your salary.
Are there income limits for an FHA mortgage? There's also no maximum income requirement for an FHA loan, so you don't have to worry about earning too much to qualify. These loans are ideal for those who want a lower down payment, and for those with lower credit scores.
The monthly mortgage payment on a $400,000 mortgage typically falls between $2,600 and $3,300. This range depends on several key factors like your chosen loan program, down payment size, and current interest rates.
If you need to tap home equity but your credit scores aren't very high, an FHA cash-out refinance may be worth considering. Loans insured by the Federal Housing Administration (FHA) are easier to qualify for than other loan programs, but they require more expensive mortgage insurance premiums.
The FHA's cash-out program allows you to cash out a portion of your equity and loan up to 85% of your home's value. You can receive less or up to $500 cashback when closing either a “no cash-out” refinance or a streamlined refinance.
You'll generally need at least a 620 credit score to refinance your mortgage. You can still refinance with bad credit, but your options will be limited. Credit score requirements vary between rate-and-term and cash-out refinance loans.
Exceptions to the Rule: When You Can Have Multiple FHA Loans
The FHA recognizes that life circumstances can necessitate having more than one FHA loan. To be eligible for a second FHA loan, you must have at least 25% equity in your home or have paid down the FHA loan balance to 75% in certain circumstances.
FHA loan rules DO allow the owner/occupier to rent out the unused living spaces in the home to others, and in certain circumstances you may even be allowed to use the income potentially generated from such rentals to qualify for the mortgage.
Missed payments stay on your credit report for six years. This doesn't mean you have to wait until it's been removed before applying for a mortgage. Some specialist lenders would consider an applicant with missed payments, but you may have to pay a higher interest rate and a larger deposit.
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call 'Minimum Property Requirements,' if a property doesn't meet even one of them, financing falls through.
The property needs to be free of known hazards that affect health and safety, the home's use, or may affect the structural soundness of the house and its marketability. These include, but are not limited to: Toxic chemicals. Radioactive materials.