Pros & Cons of an FHA Loan
An FHA loan is easier to get than a conventional loan, which could make it a good choice if you don’t have the cash for a big down payment or your credit score is on the lower end.
An FHA loan is a mortgage that’s backed by the Federal Housing Administration. Since it’s government-insured, lenders feel more comfortable taking on riskier borrowers. It’s less challenging to get an FHA loan than a conventional one, making it a good choice if you have some debt, don’t have the cash for a big down payment, or your credit score is on the lower end. Simply put, you don’t have to be a perfect candidate to qualify for an FHA loan.
Pros
LOWER DOWN PAYMENT
A major feature of FHA loans is the low down payment requirement. Borrowers with a credit score of 580 or more can put down as little as 3.5%.
LOWER CREDIT SCORE
Most loans require a credit score of at least 620, but you can qualify for an FHA loan with just 580. Some lenders will agree to a score as low as 500 with a down payment of 10% or more.
RATE FLEXIBILITY
You can get a fixed or adjustable rate, usually with better rates than a conventional loan. Your income, credit score, amount of the loan, your down payment, and the loan term all play a role in determining your interest rate.
DEBT ALLOWANCE
FHA lenders allow up to 43% debt-to-income ratio, which can make qualifying for a loan much easier. The 43% rule can be further negotiated depending on other factors like your down payment and credit score. You can also add a coborrower’s income, even if that person won’t be living in the home.
Cons
MORTGAGE INSURANCE PREMIUM
FHA lenders require a mortgage insurance premium to cover their losses in case you default on the loan. And there’s no escaping it. If you put down less than 10%, you’ll have the MIP for the life of the loan. If you put down 10% or more, MIP will end after 11 years. MIP is 1.75% of your loan. It’s due in full at the time of closing, or it can be added to the balance of your loan.
MAXIMUM AMOUNTS
The 2024 borrowing limit for a single-family home is $498,257 in most parts of the US. If you want to buy a home that’s more expensive than that, you won’t be able to use an FHA loan.
