FHA Mortgage Pros And Cons

FHA Mortgage Pros And Cons

Since its founding in 1934, the Federal Housing Administration (FHA) has helped millions of Americans get into their own homes by insuring their home mortgages. While FHA loans are exactly what some people need in order to realize the dream of homeownership, that doesn’t mean they’re the right financing option for everyone. Is an FHA loan right for you?

This article will show you both the pros and cons of FHA loans and includes the information you’ll need to make the best choice for you.

Advantages of an FHA Loan

  1. Down Payment as Low as 3.5 Percent. For people who don’t have the large cash reserves or savings needed to make a sizable down payment, low down payments can be one of the most attractive features of FHA loans. 

  2. No Prepayment Penalty. Unlike some conventional loans, FHA loans usually do away with prepayment penalties. In other words, you don’t have worry about paying a fee if you pay off your FHA loan early.

  3. More Lenient Credit Rules. With FHA loans, lenders can be more lenient with credit requirements because these loans are insured by the government. The FHA requires all of its approved lenders to take into consideration not just your credit score, but all of your financial circumstances. This means that even if you’ve been turned down previously for a conventional loan, you could still be approved for an FHA loan and at a better interest rate. 

  4. Lender Standards. The FHA holds high standards for the lenders it approves and monitors their activities to make sure they hold to those standards. You can talk to an FHA lender located near you. 

  5. Assumable Loans. In the event that you need to sell the home that you purchased with an FHA loan, the FHA will allow you to just transfer the loan to a qualified FHA buyer, which streamlines the whole process and avoids the headaches that often come if the buyer can’t secure financing. 

  6. You Can Use Gift Funds. While conventional loans will typically not allow you to use gift funds from friends or family to make a down payment, FHA loans will. They also allow the use of government grants that might be available in your area. Between these two allowances, you can expect to pay little or no cash upfront.

  7. Lower Closing Costs. The FHA keeps closing costs under control by requiring that lenders keep closing costs “reasonable and customary” for the market in your area. They also allow other costs to be paid by your lender, the seller, or the real estate agent.

Disadvantages of an FHA Loan

  1. Loan limits. The FHA sets limits on how large of a loan it will insure in any given geographical area. For this reason, an FHA loan is not the best option for those looking to purchase a luxury penthouse, for example.

  2. Mortgage Insurance Premium. As with any insurance policy, FHA mortgage insurance costs money. This happens in the form of an insurance premium paid upfront and an annual premium that is wrapped up in your monthly mortgage payment. 

  3. Higher Interest Rates. While the FHA tries to keep interest rates reasonable, they do not always offer the lowest rates. Those with excellent credit and enough cash for a down payment have a chance of getting better rates for conventional loans.

Should you go with a conventional loan or an FHA loan? Knowing the pros and cons, we recommend that you contact an FHA mortgage expert to get customized advice. 

Now that you understand the pros and cons of FHA Loans, you might be interested in seeing if you qualify. To see if you qualify for an FHA Loan, contact a Mortgage Advisor today.