The Pros and Cons of FHA Loans

When looking to purchase a house, deciding what kind of loan you want and can qualify for can be challenging. If you have a lower credit score or you don’t have a 10% down payment in the bank, an Federal Housing Administration (FHA) loan may be a good option for you. 

FHA loans are home loans that the Federal Housing Administration guarantees. The goal of the government guaranteeing the loans is to help more people purchase houses even if they don’t have the same resources as others. Like all loans, FHA loans do have pros and cons.

Pro: Lower Down Payments/Lower Credit Score

FHA loans are designed for people who are not in a perfect financial situation. FHA loans can generally be approved for people who have lower credit scores or have gone through foreclosures or bankruptcy. So even if you have some issues with your credit history, you may still be able to purchase a home, which can help rebuild your credit. 

You can also get away with a lower down payment. Sometimes even as low as 3.5%, which can be great if you don’t have much savings. In contrast, most traditional loans require a minimum 10% down payment. 

Pro: Make Home Improvements

To get an FHA loan, not only do you have to qualify but so does the property. All FHA-approved properties have to be certified safe and liveable, meaning they are move-in ready when you purchase. You won’t be stuck with a property you have to spend time and money fixing before you can move your family into it.

However, if there are improvements you would like to make to the home, an FHA 203(k) loan is also an option. This type of loan allows you to make the improvements and wrap that cost into the loan. It can be beneficial if you need a few adjustments for the home to be optimal for your family.

Pro: Housing Options

There are many types of homes available when using an FHA loan. Other loans are subject to lender approval of the property, but, with FHA loans, you can purchase a single-family home, condominiums, multi-family homes with up to four units, or permanent, fixed residences. If you purchase a multi-family home with multiple units, you can also rent out the other units as long as you live in the house for at least a year. 

The flexibility of the loan options gives you the chance to find the exact fit for your circumstances. 

Con: Higher Mortgage Insurance

While you won’t have to pay for private mortgage insurance, you will have to pay mortgage insurance for your FHA loan. The mortgage insurance costs will continue for the life of the loan. Those additional costs can make the FHA loan more expensive than a traditional loan over time. Be sure to calculate FHA loan payments while deciding what the right choice is for you.

Con: Not Saving for the Home You Really Want

Because of the additional requirements for the property to qualify for an FHA loan, some sellers are hesitant to sell to FHA buyers. That hesitancy could cost you the home you want. FHA loans tend to cost more over the life of the loan due to the lower down payment requirements and lower credit score. Either it will have a higher interest rate, or you will not pay it off as quickly. 

Be careful that you are looking at the cost over the life of the loan. It may be a better option to save up for the down payment on a conventional loan rather than purchasing right now.

Con: Minimum Property Standards

While the minimum property standards can be a pro if you are looking for a move-in-ready home, it may not be if you are looking for something that requires some work for a great return. The FHA loan may be approved for a property with some cosmetic issues, but it will likely not be approved for a property with structural or safety issues. That great fixer-upper investment you had your eyes set on may not be approved for an FHA loan if there’s too much structural damage.

What is Best for You

Your personal situation is what should determine the type of loan you seek. There are pros and cons to every type of loan one should consider. FHA loans can be a great help if you find the right property and need a little help to qualify for it. Just be sure you are aware of the pitfalls of an FHA loan as well. 

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