Is FHA a Bad Loan?

One of my former clients is moving to a different county and we’ve pre-approved her to use an FHA loan to buy her next home. Her Realtor tells us we’ve lost two properties because of the loan type. Does that mean FHA is a bad loan?

Back in the day, there might have been reason to think so. At one time, an FHA loan had what were known as “non-allowable” closing costs. These were loan fees the borrower was not allowed to pay. This meant the seller had to pay the fees on behalf of the buyer, making a purchase offer less competitive when we used FHA financing. (The current VA loan still has this feature.)

Fast forward to today, when FHA financing has no deleterious effect on the seller. Sure, the FHA appraisal report will speak to any health and safety issues that would need to be repaired prior to close, but these are no different than with conventional financing. The house can be “ugly”, but not “broken.”

FHA loans still allow for less down payment, and higher qualifying debt ratios, than other types of loans. Yes, there is mortgage insurance for the life of the loan, and there is a financed “funding fee.” That’s why you want to be working with a local mortgage professional who can quantify your options for different loan types to see what works best for you.

Fortunately, our Realtor was open to learning about the benefits of our FHA loan, so she could vouch for our pre-approval. Ultimately my client got the home she wanted.

One last thing: FHA loan limit amounts vary by county, and in our county of Kern we’re about to take a giant hit. If you start an FHA loan before the end of the year, you can borrow up to $368,750. Start the program after Jan. 1 and we’re limited to $271,050.

Tammy Engel is your local Mortgage Advisor, and has been working for your best interest throughout California since 1990. Contact her at 661/822-REAL for help with purchase, refinance, and reverse mortgage.