FHA Loans: Advantages and Disadvantages (2024)

FAQs

What is the downside to an FHA loan? ›

FHA Loan: Cons

Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.

One of the main advantages of FHA loans is the lower down payment requirement. With a credit score of 580 or higher, you could qualify for a down payment as low as 3.5%. Even with a credit score between 500 and 579, you might only need a 10% down payment.

In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.

Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.

While some sellers may be hesitant to accept an FHA offer, it's important to understand the facts before making a decision. Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.

In the last decade, the U.S. Department of Justice brought suits against many of the largest lenders in the FHA mortgage market, alleging fraud under the False Claims Act. These suits led to over $5.4 billion in settlements and caused targeted banks and their peers to precipitously exit the FHA market.

While the FHA does not have income limits, lenders need to know you have a consistent income. You will need to explain any gaps in employment within the last two years. If you have a high credit score but do not meet the FHA-recommended debt-to-income ratio, lenders may consider cash reserves.

The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.

Benefits Of FHA Loans. An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.

An FHA red flag is any safety hazard, health hazard, or deteriorating element of a home that would jeopardize financing. While one red flag might be linked with a home's backed-up sewage system, another home's red flag might be a crumbling foundation. At best, an FHA red flag can slow down the closing process.

Why are FHA closing costs so high? ›

You'll pay many of the same types of fees charged on other home loan types, including credit report fees, underwriting costs and home appraisal fees. However, because FHA lending requirements cater to borrowers with much lower credit scores than other programs, the mortgage insurance costs are higher.

While FHA loans are known for their lenient credit requirements, a history of late payments, bankruptcies, or high credit utilization can still lead to denial. Lenders use credit history as an indicator of a borrower's ability to manage debt responsibly.

An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.

A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.

FHA loans cannot be used to buy vacation homes or rental properties, only primary residences. You must also live in the home you purchase for at least one year.