Ready to purchase a home? There are several financing options to consider, including FHA loans. FHA loans are typically easier for borrowers to get approved, but you should weigh FHA loan pros and cons to make the most informed decision.
What Is an FHA Loan?
An FHA loan is regulated and insured by the U.S Federal Housing Administration and issued by an approved mortgage lender. FHA loans are designed to help low- to moderate-income families achieve homeownership, typically requiring lower minimum credit scores and down payments than conventional mortgage loans.
FHA loans also offer a safety net to lenders. Because the FHA guarantees the loans, there’s less of a risk to lenders if the borrower defaults on the loan. This is why lenders offer FHA loans with more lenient qualifying guidelines.
According to the FHA’s 2021 Annual Financial Report, the FHA has insurance on more than 7.8 million single-family forward and reverse mortgages. FHA loans are especially popular among first-time homebuyers.
More than 84% of all FHA loans were for borrowers purchasing their first homes — a record high.
Looking to get approved for a home loan? Total Mortgage can help you buy your first home faster. We have branches across the country. Find a Total Mortgage branch near you.
FHA Loans Pros and Cons Explained
Like any other type of loan product, there are FHA loan pros and cons and it might not be the right choice for everyone. Before deciding on an FHA loan, it’s important to weigh the benefits and drawbacks.
Advantages and Benefits of FHA loans
- There’s a lower credit score requirement. Most conventional mortgage loans require a minimum FICO credit score of 620, but FHA loans are not as strict. To qualify for an FHA loan, your credit score must be at least 580; however, each lender has different requirements.
- You can make a low down payment. If you don’t have the cash reserves, FHA loans give the option for a smaller down payment. The minimum down payment you make on an FHA loan also depends on your credit score. If your credit score is 580 or higher, you may qualify for a down payment as low as 3.5%. If your credit score is lower, you may still qualify for a loan (depending on the lender) but you will need to make a 10% down payment.
- A higher debt-to-income (DTI) ratio is accepted. Your DTI ratio is a metric that lenders use to measure your ability to manage your monthly payments. FHA loans typically offer more leniency over conventional mortgages. Your DTI ratio can be as high as 43% to qualify.
- There are no income limitations. FHA loans are not only available to first-time buyers or buyers with limited income. There are no minimum or maximum income requirements for FHA home loans that would otherwise disqualify you.
- You can potentially qualify for a better interest rate. Because FHA loans are backed by the federal government, there’s less of a financial risk to lenders. This allows lenders to give borrowers a lower interest rate on FHA loans.
- There’s less of a wait time after a bankruptcy or foreclosure. A bankruptcy stays on a credit report for seven to 10 years, but the FHA allows borrowers to qualify for an FHA loan within 2 years after a chapter 7 bankruptcy and 12 months after a chapter 13 discharge. After a foreclosure, you may qualify in as little as three years.
FHA Loan Drawbacks
- You’re required to pay a mortgage insurance premium (MIP). You won’t have to pay private mortgage insurance (PMI), which is typical with conventional loans if you make a down payment under 20%. However, FHA loans do require you to pay MIP, regardless of the amount of down payment, upfront at closing and annually. You’ll need to MIP for the life of the loan unless you made a minimum 10% down payment, after which it will end after 11 years.
- There are loan maximums. An FHA loan may not work if you want to borrow a large amount of money. For 2022, the FHA limit was set at $420,680 for single-family home loans or $970,800 for a single-family home loan in a high-cost area.
- There are minimum property standards. Similar to other government-backed loans, the property that is being purchased with an FHA loan must meet certain guidelines. An appraiser must report the property’s condition on the FHA’s appraisal form. This means no fixer-uppers.
- Some sellers might be less likely to accept offers coming from FHA buyers. FHA loans are sometimes viewed as less favorable than conventional loans in a competitive market.
- You could end up paying more over the long term. Your interest rate may be lower, but your APR, which is the annual cost of the loan, can sometimes be higher than conventional loans.
Is an FHA Loan the Right Option for You?
An FHA loan may be the right choice if you have good or fair credit and don’t have the cash reserves to make a large down payment. FHA loans allow people to become homeowners much more quickly than they would be able to with a conventional loan.
On the other hand, if you have good or excellent credit and a low DTI ratio, you could qualify for a conventional mortgage even if you don’t have the money saved for a 20% down payment.
Plus, you could put as little as 3% down for some conventional mortgages but borrowers with lower credit scores or higher DTI ratios may need to put down more.
FHA Loans With Total Mortgage
There are many FHA advantages and disadvantages to consider, but the choice you make depends on your financial situation. If you don’t have the best credit history or you don’t have much cash to put down, then an FHA mortgage loan may be an option worth considering.
Total Mortgage currently offers 15, 20, 25, or 30-year fixed-rate FHA mortgages. FHA adjustable-rate mortgages (ARM) are also available.
Apply today for an FHA loan with Total Mortgage and we’ll close your new purchase in 21 days or less.