Pros & Cons of FHA Loans

Posted on: 17 December 2015

Mortgage loans insured by the Federal Housing Administration (FHA) are referred to as FHA loans. These loans offer a lot of benefits to people that want to buy homes, but there are a couple downsides to these loans. If you are interested in buying a house and are having trouble qualifying for a regular type of mortgage, you could look into an FHA loan. Before you do this, it is important to understand the key benefits these offer, and the disadvantages they offer.

The Top Benefits

FHA loans were designed to help people qualify for loans if they did not meet the normal requirements of lenders. This means that people can qualify for FHA loans if they:

  • Have poor credit—A lender offering an FHA loan will look at a person's credit score when determining whether to issue the loan. If the person's score is at least 580, the person should not have any trouble getting the loan. There are also programs for people with scores under this, but they typically still require a score of at least 500. For other types of mortgage loans, you may need a score of at least 660, if you want a good interest rate.
  • Do not have a lot of money to put down—Most conventional loan programs require 20% down on a house, but FHA loans only require 3.5% in most cases. If your credit score is low, you may be required to put 10% down on the house.

These two factors make it easier for people to obtain loans, and lenders that issue FHA loans can do issue to people like this because the loans are fully insured. If a lender issues a loan and the borrower defaults, the FHA will step in and pay the balance owed on the loan. The lender has nothing to lose in this situation.

The Disadvantages

Getting an FHA loan is a great way to buy a home if you do not qualify for other types of mortgage loans, but you should realize there is one major disadvantage of FHA loans. With an FHA loan, you will be required to pay two different types of mortgage insurance.

The first type is called upfront mortgage insurance, and this is something you will have to pay when you get the loan. It is equal to 1.75% of the amount of the loan you take on the house. For example, if you borrow $200,000 for a house, you will have to pay $3,500 for this. This expense is viewed as a closing cost; however, you might be able to roll the amount into your loan.

The second type of mortgage insurance you will pay is monthly insurance. This is something you will pay each month in addition to your normal mortgage payment. The amount you must pay will be calculated based on the length of your loan and your loan-to-value ratio, but it is typically between 0.8 % to 1% of the loan amount.

In addition to this, there are several other disadvantages of FHA loans, and one involves the interest rate. Lenders that offer FHA loans do not base interest rates on a person's creditworthiness. While this may be good in some cases, it can be a negative factor in others. Everyone that gets and FHA loan will get the same interest rate, no matter how their credit is at the time.

If you really want to buy a house, but do not have enough money for a down payment, getting an FHA loan is a great option. To learn more, contact local lenders like Mortgage Master Service Corporation.