Pros and Cons with FHA Loans
FHA loans have been around for quite a while. Since 1934 to be exact. The Federal Housing Administration is a department within the department of Housing and Urban Development, or HUD. Prior to the introduction of the FHA loan program, universal lending guidelines were pretty much non-existent. FHA loans changed all that and as long as a bank or mortgage company used proper FHA protocol when approving an FHA loan application, should the loan ever go into default the lender would be compensated for the loss. This made the FHA loan program a sudden hit in the real estate industry and today is the loan of choice for most first time buyers. But you don’t have to be a first time buyer to be eligible for this popular program. To find out if an FHA loan is right for your situation, here are some pros and cons you should consider.
The down payment for any FHA loan is only 3.5% of the sales price of the home. This is one of the primary reasons FHA loans are popular with first timers because there’s less cash to close required compared to other mortgages.
FHA loans are also easier to qualify for compared to other low down payment options. Debt ratios can be relaxed and lower credit scores can still be accepted. Low down payment conventional loans can require higher credit scores compared to FHA loans.
Interest rates are still very competitive despite the low down payment requirement. Conventional loans can bump up the interest rate on certain low down payment programs, making qualifying more difficult.
The down payment and closing costs can be in the form of a financial gift from a family member or qualified non-profit agency.
FHA loans are more lenient when non-occupying coborrowers are included on a loan application to help qualify.
FHA loans come with two forms of mortgage insurance. One is an upfront mortgage insurance premium that can be and almost always is rolled into the final loan amount. This increases the loan balance at the outset. The other form of mortgage insurance is an annual premium that is paid in monthly installments. This affects debt to income ratios.
FHA loans cannot be used to finance a vacation home or a rental property and can only be used to finance a primary residence.
FHA loan limits are lower compared to conventional mortgages and can change from county to county.
Because of the low down payment, you’ll pay more in interest over the term of the loan compared to making a larger down payment and borrowing less.
So, all that being said should you apply for an FHA loan? If you’ve got a down payment of anything such as 10% or more, probably not. In fact, with a 20% down payment you can get a conventional loan with no mortgage insurance with some very competitive interest rates.
However, if you want to come to the closing table with as little cash as possible and still get a competitive home loan, the FHA mortgage program just might be your best option.