The Pros and Cons of FHA Loans

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If you’re a first-time homebuyer, or if you haven’t owned a home in the last few years, you may be considering an FHA loan. An FHA loan is a type of loan that is available from many different lenders. It’s not a loan from the government. The biggest draw to an FHA loan is the small down payment. Here are some things about an FHA loan to consider.

The Advantages of an FHA Loan

Low down payment. FHA loans make home ownership easier. First of all, your down payment is lower than usual at just 3.5%. This can be a real help to people that can’t save up enough for a 10 or 20% down payment.

Less than perfect credit. Another advantage is that you can have a lower credit score when applying for an FHA loan. If you’ve been renting, you’ve spent a lot of extra money on housing so raising your credit score can be a challenge.

The Downsides

No fixer-uppers. If you get an FHA loan, the home needs to meet certain requirements. It doesn’t have to be perfect, but issues like broken windows or other safety issues may need to be repaired by the seller before you can buy the home. Some homeowners specify that they will not sell to someone with an FHA loan because something about the property doesn’t meet the criteria.

That doesn’t mean that all less than perfect houses are excluded. You can buy a home that needs a little work especially if the work is aesthetic.

Mortgage insurance. The Federal Housing Administration back FHA loans so that lenders won’t lose money if you default on your loan. That’s why it’s easier to get them, the banks have less to lose.

FHA loans are insured by the government, but the price of the insurance is passed on to you. It will often be added to your monthly payment which is already slightly higher because of the lower down payment.

If you have the money available for a higher down payment you may want to ask your lender what loans you qualify for. Your monthly payment could be lower with a conventional loan. If you don’t have the money for a larger down payment, an FHA loan might be the right thing for you. Talk to your lender to find out if you qualify.

An FHA loan can help you on your path to home ownership. Let your realtor know what kind of loan you’re approved for and she can help you find the right house. If the house needs work, your realtor will negotiate to get the work done so the house qualifies for your loan. No matter what kind of home loan you end up with, your realtor can work with you to help you find the right home for you and your family. The loan process may seem complicated, but this is likely the biggest investment you’ll ever make. So, it’s worth it to make the right choices.