Dave Ramsey and Suze Orman Recommend Avoiding This Type of Mortgage
Should you listen to the finance gurus?
- Dave Ramsey and Suze Orman are trusted financial experts.
- They both advise borrowers against taking out an FHA Loan, due to its high cost.
- You can get a cheaper mortgage by improving your financial situation.
When you're applying for a mortgage to buy a home, you will have many different kinds of loans available to you. Deciding which is the right one can be complicated, but you can make the process easier by listening to expert advice.
Many financial professionals have offered tips on securing a home loan. This includes Dave Ramsey and Suze Orman. In particular, Ramsey and Orman have both advised against a particular kind of mortgage for most borrowers. Here's the loan they suggest steering clear of.
This loan is bad news, according to Ramsey and Orman
According to both Ramsey and Orman, borrowers should typically avoid FHA Loans. These are loans secured by a government agency called the Federal Housing Administration.
FHA loans are generally considered easier to qualify for than conventional loans due to the fact the government guarantees them and protects lenders against losses. And they can be tempting for first-time borrowers and those with imperfect financial credentials since you can get an FHA loan with a pretty low credit score and low minimum down payment.
Even though FHA loans are theoretically designed to help people buy houses, neither Ramsey nor Orman think taking out one is a good idea.
Why do Orman and Ramsey dislike FHA Loans?
Both Ramsey and Orman have presented some really valid reasons for disliking FHA loans and suggesting borrowers opt for another type of mortgage.
Ramsey's blog states clearly that they "don’t recommend FHA loans because they’re one of the most expensive types of mortgages. And they’re sneaky about it too: They seem cheaper up front, but when you look at the total cost, they’re actually more expensive"
Ramsey gives numerous examples of some of the added costs you'll face, including upfront and ongoing mortgage insurance premiums. While most conventional lenders require mortgage insurance with small down payment loans, FHA's insurance can be especially expensive.
That's because there's usually no upfront monthly cost for the private mortgage insurance conventional lenders require, but there is for the FHA's insurance. And with a conventional loan, the insurance is required only for a limited time, but it's mandate for the life of the FHA Loan.
Ramsey isn't the only one concerned about the added costs of FHA loans. Orman has also warned that "often people are steered into FHA-insured mortgages because they don’t have a great credit score, and thus would pay more in insurance if they took out a conventional mortgage with PMI."
Since both of these finance gurus have warned your loan could cost a lot more if you opt for an FHA loan, it's definitely worth running the numbers carefully before deciding to move forward with this kind of mortgage.
What should you do instead of getting an FHA loan?
Instead of getting an FHA loan, both Ramsey and Orman urge that you save up more money and improve your financial situation so you can qualify for a more affordable mortgage without unnecessary added costs.
As Orman says clearly on her blog, "Here’s the truth I want you to stand in: If your credit score is too low to qualify for a good conventional mortgage/PMI deal I don’t think you should be buying. Raise your credit score first. It’s going to help you qualify for a better interest rate and a better PMI deal."
This advice is worth heeding, as you don't want to make your mortgage debt more expensive than necessary since you'll be paying off your home for decades to come.
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