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Pros and Cons of FHA Loans Every Homebuyer Should Consider

Key Learnings
  • FHA loans come with many benefits, but it's important to know the potential drawbacks
  • FHA loans are great for many first-time and repeat homebuyers with a lower credit score and who want to save on a down payment
  • FHA loans do come with borrowing limits and come with an overall higher mortgage insurance
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While there’s a lot to like about FHA loans, they may not be right for everyone. Before you make a major financial commitment, it’s important to understand the pros and cons of FHA loans. Only then can you truly decide whether it’s right for you.

Pros of FHA Loans

An FHA loan is designed to help potential homebuyers with less-than-perfect finances buy a home. It offers many potential benefits that you may not be able to get when applying for a conventional mortgage. Here’s a closer look at some of the most important advantages of an FHA loan.

Lower Down Payment

If you don’t want to wait forever to buy a home, the lower down payment requirement is one of the biggest FHA loan advantages. Most FHA loans allow you to put down as little as 3.5% of the purchase price. This is a huge advantage for buyers who don't have a large savings account or have limited financial resources. Other mortgage products may have down payments closer to the 20% mark.

Taking advantage of this opportunity can help you get into a home many years sooner than you could if you had to save up a larger amount.

Lower Credit Score Requirements

Many people with bumps in their credit history worry that they won't be able to qualify for a home loan. Luckily, FHA loans are available to borrowers with less-than-ideal credit.

Most lenders will write FHA-backed loans for borrowers with credit scores of 580 or higher. If you’re in the 500-579 range, don’t despair. You can also qualify for an FHA loan, but you may need to come up with a 10% down payment instead of the standard 3.5%.

FHA loans are also sometimes a good option for people who have recently gone through a foreclosure or bankruptcy. Depending on your circumstances, you may be able to qualify for an FHA loan within one to two years after the incident.

No Income Limits

FHA loans don’t have any minimum or maximum income requirements. This is a unique benefit not found in many other mortgage products, aside from the USDA loan. This means that higher-income earners with credit problems can still qualify for FHA loans. Even if you make a substantial salary each year, you can still benefit from the lower down payment and relaxed approval requirements.

Multiple Housing Options

You can use an FHA loan to purchase multiple types of properties. This includes single-family homes, condominiums on permanent land, manufactured homes on permanent land and multifamily homes with up to four units - though you may have a hard time finding a lender willing to do a manufactured loan.

This gives you plenty of options and some room to get creative. For example, you could buy a multifamily home and use the rent you would charge on the other units to qualify for the loan, as long as you live there as well.

Note: Paddio does not offer FHA financing for manufactured homes

Lower PMI Cost

If you put less than a 20% down payment, most conventional loans require you to carry Private Mortgage Insurance (PMI). This insurance provides the lender protection in case you fail to repay your loan. The premiums for PMI are often much higher if you have bad credit. With an FHA loan, however, you’ll pay the same insurance premium regardless of your credit score. If you’re credit-challenged, this could save you a significant amount of money over the lifetime of your loan.

Cons of FHA Loans

If you've been asking yourself, “Should I get an FHA loan?,” after reading all these FHA loan pros, you may think the answer is a resounding yes. But don’t be too quick to make your decision. You'll also need to ask yourself, "What is the downside of an FHA loan?"

While FHA loans certainly offer many advantages, there are also some potential drawbacks you need to be aware of. Researching some of the common problems with FHA loans will help ensure you don’t run into any unexpected surprises during your homebuying journey.

Loan Limits

If you’ve got your eye on a high-priced home, FHA loan borrowing limits could be one of the biggest FHA loan cons. The limits vary depending on the county where the home is located. This allows them to account for the difference in property from one area to the next.

In 2022, the borrowing limits for FHA-backed loans for a single-family home range from $420,680 to $970,800. These limits adjust periodically based on a percentage of the current standard limits for conventional loans. If you’re using an FHA loan to purchase a multifamily home, these limits are higher and vary based on the number of units in the home.

Overall Higher Mortgage Insurance

While borrowers using FHA loans with a down payment of more than 20% don’t have to pay private mortgage insurance (PMI), they are required to pay for a different type of mortgage insurance. This is divided into two parts. First, you’ll need to pay a mandatory upfront premium of 1.75% of the loan amount.

In addition, an annual mortgage insurance premium (MIP) is added to your monthly payments. This amount may be higher or lower than the amount that would be required for other mortgages. Often, this results in overall higher mortgage insurance costs.

Strict Property Standards

The government requires that all properties purchased with FHA-backed loans meet minimum health and safety standards. If the property you’re considering isn’t structurally sound or has safety issues, you may not qualify for an FHA loan. This could be an issue if you’re thinking about buying a major fixer-upper.

Before you can qualify for the loan, the property must undergo an inspection. Some things that could cause it to fail include a sagging foundation, leaking roof, signs of decay, faulty wiring or contaminated soil. If the inspection uncovers any of these issues, they’ll need to be fixed before your loan is approved.

Primary Residence Requirement

You can only use an FHA loan to purchase your primary residence. If you’re planning to buy an investment property or a vacation home, you’ll need to use a different type of loan.

Continuing Mortgage Insurance

If you put down less than 10% of the home’s purchase price, an FHA loan requires you to carry mortgage insurance for the lifetime of the loan. This differs from conventional loans, which allow you to drop your mortgage insurance once you have at least 20% equity in your home. Even if you put down 10%, you’ll be required to carry the insurance for 11 years. This mortgage insurance requirement may increase your overall cost compared to insurance premiums on other types of mortgages.

The Bottom Line

Carefully weighing the pros and cons of FHA loans is an important step in deciding whether it’s right for you. If you’re still not sure, the professionals at Paddio are here to help. We’ll provide you with expert advice about FHA loans and help you choose the best option for your needs.

Written by:
Crystal Shifflett
Loan Coordinator

Crystal’s experience spans many aspects of the homebuying process, including closing and title work, but perhaps her own personal experience of purchasing several homes across state lines helps her connect with and advocate for homebuyers.

More articles by Crystal Shifflett
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