Even if you have the cash in hand to buy the house it’s probably better to get a mortgage. That way you’d still have the cash that you could use to make an investment and get a nice return on your money.
What’s an FHA loan?
An FHA loan or mortgage is a popular choice, especially for first-time homebuyers. It is called an FHA loan because the Federal Housing Authority backs it. It’s a type of loan created by the government so that borrowers could get low-cost financing.
Another advantage of an FHA loan is that it is not as strict in terms of what’s required to qualify for one. It also requires less of a down payment. While most conventional loans require 20% down, the minimum down payment for one of these loans is 3.5%. Plus, with a conventional loan if you can’t put 20% down, you will most likely be required to get what’s called private mortgage insurance or PMI.
Lower closing costs
In most cases, an FHA loan will have lower closing costs than a conventional one. This is because the closing costs of an FHA loan are highly regulated by the Department of Housing and Urban Development (HUD). In comparison, with a conventional loan your closing costs could be higher – depending on the rates of your loan.
There is no reserve requirement
If you choose an FHA loan, there is no reserve requirement. You’ll not be required to pay any principle, taxes, interest or insurance in advance. If you should decide to pay off the loan in advance for some reason, there are no penalties.
It’s not as hard to get an FHA loan
If you’ll be using the house as your primary residence and can afford your monthly payments, you should be able to easily get an FHA loan. In other words, your lender will spend less time investigating how creditworthy you are because it will be more concerned with your ability to repay the loan. Plus, it’s usually possible to get an FHA loan with a lower credit score than if you were applying for a conventional loan.
The limit or the amount you can borrow with an FHA loan is usually lower than that with a conventional loan. This is because FHA limits are tied to your monthly income. If you need to borrow more than your limit, you will have to pay an additional amount of money or you could take out another loan to cover the excess.
FHA loans are assumable
All loans insured by the FHA can be assumed, which can be very helpful when it comes time to sell that house. In other words, the buyer could just take over the loan and not have to pay any refinancing costs. In fact, the only loans that can’t be assumed are those that originated before December 1, 1986. Of course, the person who wants to buy your house will have to show go through a credit check to ensure he or she is credit worthy.
The advantages of a conventional mortgage
Of course, a conventional mortgage does have its advantages. The primary one is that with a conventional mortgage you probably won’t have to pay for mortgage insurance upfront or for the monthly mortgage insurance you would be required to pay with an FHA loan. As of April, 2010 the FHA requires upfront mortgage insurance of 2.25% on the loan amount, regardless of how much you put down. As an example of what this would cost you, if you were applying for a $100,000 mortgage, you would have to pay $2,250 for the mortgage insurance upfront, plus your down payment and your other closing costs.