The Pros and Cons of FHA Loans
What are the Advantages and Disadvantages of a FHA loan?
It is crucial to not rush into any home loan and to closely evaluate what is your best option. The following outline of pros and cons of FHA loans should help shed sufficient light onto whether or not a FHA loan is suitable for your needs. We encourage you to allow us to help you compare the loan terms of a FHA loan and other loan types you might be eligible for, such as a conventional mortgage. There are many cases which a FHA loan is not only the best – but the only – option for a homebuyer to get a home loan.
What Are The Pros? – FHA loans certainly have their “pros”, hence so many people opt for 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 mortgages. Not only is this fantastically low, but it can be borrowed from relatives or a down payment assistance program.
- Easier Qualifications – Many who apply for other loans and do not qualify are able to get a FHA loan without any issue.
- 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 incldues 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 $271,050 in lower cost areas, and all the way up to $625,500 in “high cost” areas, such as many counties in California, New York, and Hawaii. For counties that the maximum loan amount is $271,050, that same applicant may be able to borrow up to $417,000 on a conventional loan (if they qualify).
A lot of people ask “what is the best home loan?”, or “which is better between a FHA loan and conventional mortgage?”, or “are FHA loans or USDA loans better?”. There are not definitive answers to such questions. The answer will always be dependent on the individual borrower (or co-borrowers). Therefore, when you apply, we will help you clearly see what all of your options are and help you made an informed decision about what is best for you.