FHA loans are a popular mortgage for first-time homebuyers. They have low down payment requirements, they allow for very low credit scores, and they’re generally pretty easy to qualify for.
Still, despite all their advantages, FHA loans aren’t right for everyone.
Are you considering using one for your home purchase or refinance? Here are the pros and cons to consider first.
The benefits of FHA loans
FHA loans come with quite a few perks. For one, they allow for low credit scores. Technically, the FHA allows for scores down to 500. Though many lenders will require slightly higher than this (usually in the high 500s), FHA minimums are typically still much lower than other mortgage programs.
They also have minimal down payment requirements. If you have a 580 credit score or above, you can make a down payment of just 3.5% of your loan amount. If you have a score below this threshold, you’ll need a 10% down payment.
Finally, FHA loans come with low interest rates. Because the Federal Housing Administration is assuming some of the risk of these mortgages, lenders are able to offer affordable rates, even to borrowers with less-than-perfect credit.
The drawbacks of FHA loans
FHA loans have their downsides too. The biggest? That’d be the mortgage insurance (MIP) they require. Not only can MIP be expensive (it costs 1.75% of the loan amount upfront and then anywhere from .80% to 1.05% annually), but it also typically lasts for the entire life of the mortgage term.
On conventional loans, you can cancel your mortgage insurance at a certain point in the loan. With FHA loans, you can only cancel MIP if you make a 10% down payment or more — and even then, you can’t do it until the 12th year of your loan.
Another downside is the lower limits of FHA loans. In 2022, the FHA loan limit is $420,680 in most parts of the country. Conventional loans go significantly higher, clocking in at $647,200 in the majority of markets.
There are also strict property standards for FHA loans, so if you’re hoping to buy a fixer-upper or home in need of major TLC, there’s a chance an FHA loan won’t cut it. (You may need to look to a more flexible conventional loan instead).
More on FHA loans
Want to learn more about FHA loans or what one may cost you as a homebuyer? Get in touch with a Premier Nationwide Lending officer in your area today.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.