Pros And Cons Fha Loan

Insiders’ experts pick the top goods and services to assist you in making wise financial decisions (here’s how). Although we occasionally receive commissions from our partners, all opinions expressed here are our own. Terms apply to offers listed on this page.

What is an FHA loan?

People with less-than-ideal financial situations can use an FHA loan to buy a home. First-time homebuyers who may not have had time to save much for a down payment or pay off all of their debts yet will find this type of mortgage to be especially helpful.

You have two basic mortgage options when purchasing a home: conventional government-backed

A conventional mortgage is not backed by a government agency, and obtaining one is a little more difficult. As little as 3% down may be required for a conventional mortgage. A 620 credit score and a 36% debt-to-income ratio are also required.

A federal agency will back a government-backed mortgage, and the Federal Housing Administration will back an FHA loan. The FHA provides your lender compensation if you miss mortgage payments.

Although you don’t apply through the FHA, the FHA will guarantee your loan. Youll visit a regular mortgage lender that approves FHA loans. A lenders website should specify whether it issues FHA loans.

An FHA loan only requires a 3. 5% down payment, 43% debt-to-income ratio, and 580 credit score. Actually, if your credit score is 500 or lower, you can apply for an FHA loan. However, if your credit score is between 500 and 579, you’ll need to put down at least 10% of the purchase price.

Who qualifies for an FHA loan

All of the following requirements must be met in order to qualify for an FHA loan:

Credit score and down payment. If your credit score is at least 580, then youll need 3.5% for a down payment. Youll need 10% if your score is between 500 and 579.

Debt-to-income ratio. Your DTI ratio is the monthly amount you pay toward debts divided by your gross monthly income. For an FHA loan, your DTI ratio should be 43% or lower.

Property type. You can use an FHA loan to buy a single-family home, or a multi-family home for up to four families. You can also buy a condo or manufactured home.

Borrowing limit. The FHA restricts how much you can borrow. The limit depends on where you live and what type of property you buy. For example, the limit for a two-family home in Los Angeles will be different than for a four-family home in Orlando. Enter your state and county information to see your borrowing limits on the US Department of Housing and Urban Development website.

Property standards. You can use an FHA loan to buy a home with normal wear and tear, but not one with major structural or safety issues. For example, your roof must be in good condition, and the home cant be near a hazardous waste location. The property also cant be in an area subject to a lot of noise, like a high-traffic road.

7 types of FHA loans

The FHA administers several types of home loans. See which one fits your homebuying situation:

The pros and cons of FHA loans

Many Americans find FHA loans to be excellent options, but not everyone does. Here are some things to consider before you apply:

The pros of FHA loans

More lenient borrowing requirements. FHA loans requirements surrounding credit scores, debt-to-income ratios, and down payments are more lax than conventional loans stipulations. This means you can own a home even if your finances arent in perfect shape.

No income limits. Government-sponsored mortgage companies Fannie Mae and Freddie Mac offer conventional mortgages with just 3% down. These can be great loans, but you dont qualify if your income is high compared to the median income in your area. But you can be eligible for an FHA loan regardless of your income level.

No private mortgage insurance. Conventional mortgages require you to get PMI if you have less than 20% for a down payment. PMI typically costs between 0.2% and 2% of your mortgage amount. But you dont need PMI with FHA loans.

The cons of FHA loans

Mortgage insurance. No, you dont have to pay PMI. But FHA loans do come with a different type of mortgage insurance premium that comes to 1.75% of your loan at closing. Then youll pay an annual premium of 0.45% to 1.05% of your mortgage. If youre on the fence between choosing a conventional mortgage or FHA loan, do the math to see whether PMI or FHA mortgage insurance will be more affordable.

Minimum 3.5% down payment. This is still a relatively low minimum down payment. But if youre struggling to come up with 3.5%, consider looking into a USDA or VA loan. These are two other government-backed loans, and if you qualify, you might not need a down payment at all.

Borrowing limits. FHA loans restrict you to borrowing under a certain amount, which could keep you from buying a home you like.

Minimum property standards. You wont be approved for an FHA loan if your home has significant structural or safety issues, or if its in a loud area. These restrictions could prevent you from buying a major fixer-upper or a home in a certain area.

Even if your finances aren’t as stable as you’d like, an FHA mortgage still makes it possible for you to purchase a home.

Note from the Editor: No card issuer has reviewed, approved, or otherwise endorsed any of the opinions, analyses, reviews, or recommendations contained in this article. Read our editorial standards.

Please be aware that while the above offers were correct at the time of publication, they are always subject to change and may now no longer be available.

FAQ

What is the downside to a FHA loan?

FHA loans will likely have higher costs upfront and with each payment, which may indicate that borrowers aren’t ready for a mortgage. Mortgage insurance is also required, and FHA loans are less flexible than conventional loans.

Is it better to go conventional or FHA?

If you have good or excellent credit, a conventional loan is frequently preferable because it will result in lower mortgage rates and PMI costs. However, if your credit score is in the high 500s or low 600s, an FHA loan may be the best option. For lower-credit borrowers, FHA is often the cheaper option.

Is getting an FHA loan a good idea?

Advantages of FHA Loans Down payment: The 3. FHA loans have a 5% minimum down payment requirement, which is less than many (but not all) conventional loans. The low down payment requirement is probably the main reason you’d be considering an FHA loan if you have a credit score of 650 or higher.

Why do buyers not want FHA loans?

Because FHA loans make it possible for borrowers with less-than-perfect credit and low to moderate incomes to purchase homes, some sellers may believe that FHA buyers have a lower approval rate than conventional borrowers.