FHA Loan Pros and Cons
It is important to closely evaluate different types of mortgage programs in order to be certain which type of home loan is right for you. Hopefully the following outline of the pros and cons of FHA loans can help you better understand if an FHA loan is right for you. We encourage you to compare all of your loan options, so that you can make an education decision.
What Are The Pros? – FHA loans certainly have their “pros”, which is why so many people choose this type of home loan. What exactly are these advantages, and who stands to benefit from them?
- Low Down Payment – The famous 3.5% down payment is the main attraction to FHA loans. Another advantage to the down payment requirements for FHA loans is that the money can be borrowed from relatives or a down payment assistance program.
- Low Credit Scores Allowed – In order to qualify for a 3.5% down payment, you only need a 580 credit score. However, FHA loans allow credit scores all the way down to 500, but if your credit is below a 580, you will need to put 10% down.
- Easier Qualifications – Many borrowers who are unable to qualify for a conventional loan, are able to qualify for an FHA loan due to the less stringent qualification requirements.
- Compensating Factors – A really neat aspect about FHA loans is what are known as “compensating factors”. if you do not meet the standard guidelines, you still have a chance to get approved if you have areas which compensate for the requirements you fall short of meeting. For instance, a higher DTI ratio can be overlooked if you have higher credit and/or more in savings.
- Unmarried Couples – Without any question, FHA loans are often the best option for an unmarried couple to buy a home together.
- Multifamily Homes – These loans provide a feasible way to buy a multifamily home without having to put down a lot of money (2-4 units only and must occupy one of the units to be permitted).
- Assumable / Transferable – You can transfer the FHA loan to another borrower (assuming they qualify). This is known as “assumability” and means that the mortgage note can be transferred to another person, including someone who buys your home.
- Streamline Refinancing – Exclusively for those who already have a FHA mortgage, the FHA streamline program allows you to refinance your home loan and reduce your interest rate without having to submit a new appraisal, a credit check, or any income/employment documentation.
What Are The Cons? – While FHA mortgages clearly have a few reasons to appreciate them, they also have their downsides. What exactly are these disadvantages?
- Mortgage Insurance – The only major “con” with FHA is that there are two types of mortgage insurance, and they are both expensive. This includes both upfront mortgage insurance, and monthly mortgage insurance. The upfront mortgage insurance is 1.75% of the loan amount. The monthly premiums are 0.85% of the loan amount, recalculated annually, and divided into 12 monthly payments. This amounts to a significant sum of money overtime.
- FHA Appraisal – All homes which are to be insured by a FHA loan must have an appraisal (the FHA does not issue loans, but backs them and has requirements of what is eligible to be insured). The appraisal fee is charged to you the borrower. There is also limitations on what properties can be financed with an FHA loan. However, this only restricts a minimal amount of properties, and it is often for your benefit. It is to ensure that a property does not have hazardous materials, structural issues, and other matters of this kind.
- Loan Limits – All FHA loans have a “ceiling” amount of how much can be borrowed in a certain county. This ranges from $314,827 in lower cost areas, and all the way up to $726,525 in “high cost” areas, such as many counties in California, New York, and Hawaii. In many locations, the loan limits are higher for conventional loans than they are for FHA loans.
If you would like to learn if an FHA loan is the right type of mortgage for you, we can help you compare all of your options. When you speak to a loan specialist, they will help you understand clearly what all of your options are, and help you made an informed decision about what is best home loan for you.