Could a loan insured by the Federal Housing Administration (FHA) be the financial tool that you need to succeed in your quest to buy your dream home? Reviewing the pros and cons of FHA loans will help you make an informed decision.
The Pros and Cons of FHA Loans
FHA loans are designed to make buying a home easier for low- and moderate-income borrowers, and they are not limited to first-time homebuyers (source). Provided by private lenders and backed in part by the U.S. government, these home loans offer a way for buyers who have imperfect credit or little in the way of savings to make the leap from renting to owning their home.
FHA Loans: The Upsides
Why are FHA loans often recommended to people who are dipping their toes in the housing market? The National Association of Realtors points out several upsides to FHA loans:
- Low Down Payment Options: With a credit score of 580, you need a down payment of just 3.5 percent to use an FHA loan. That means that you can buy a home sooner or hold back a larger cash reserve to give you more financial flexibility as you settle into your dream home.
- Down Payment Opportunities: Where will your down payment come from? With FHA loans, it doesn’t have to be out of your pocket. Gifts from family and friends can fund your down payment. Alternatively, you may be able to put together a down payment by using down payment assistance programs.
- Relaxed Qualifying: Are the requirements for a conventional loan too strict for you? Thanks to the government backing that limits a lender’s risk, qualifying for an FHA loan is noticeably easier. Lower credit scores are acceptable, although you may need to come up with a larger down payment if yours dips below 580. Lenders are also less stringent about other factors, including your debt-to-income ratio and the size of your nest egg.
- Closing Cost Flexibility: With an FHA loan, sellers can pay up to 6 percent of the home’s price towards your closing costs.
- U.S. Department of Housing and Urban Development (HUD) Standards: HUD insists that any home purchased with an FHA loan meets certain standards. Since these standards are largely geared toward ensuring that the home is healthy and safe, they offer valuable consumer protections.
FHA Loans: The Potential Pitfalls
With so many advantages, why do some borrowers opt for other loan programs? When it comes to FHA loans, there are both pros and cons. The Balance notes a few potential pitfalls associated with these home loans:
- Low Down Payment Options: If making a low down payment means that you’ll ultimately borrow more, then you’ll also pay more in interest. This increases the total cost of your loan.
- Mortgage Insurance: Using an FHA loan means paying mortgage insurance is a must. In fact, you’ll pay twice. First, there’s a charge of 1.75 percent of your purchase price for upfront mortgage insurance. Then, there’s a monthly mortgage insurance premium that is tacked onto your monthly payment for the entire life of the loan.
- Property Limitations: FHA loans generally work well for move-in ready properties, but if you hope to snag a major deal by purchasing a fixer-upper, then you may run afoul of the property standards set by HUD. If so, you’ll need to either find a different property or find a different loan.
- Seller Preconceptions: Some sellers worry that selling to a buyer who is using an FHA loan will slow the sale. They may be hesitant to accept offers from buyers who plan to use this form of financing.
Do you have more questions about the pros and cons of FHA loans? At PrimeLending of Denver, we understand the difference that getting the right home loan can make when you’re working hard to achieve your housing dreams. That’s why our knowledgeable loan experts always ask questions and listen carefully to your answers so that we can match you with the best home loan for your unique needs. How can we help you? To find out, contact PrimeLending of Denver today.