Pros and Cons of FHA Loans

A mortgage is a big commitment that can affect your finances for several years. Some come with longer term commitments, like 30 years, while others come with shorter-terms but higher payments, like 15-year mortgages. This is why it’s important to do your due diligence when comparing your home financing options.

Federal Housing Administration loans, or FHA loans, are a common mortgage choice for many first-time homebuyers. They’re government-backed, which means they come with some additional perks but this also means they come with some drawbacks.

Here are some of the most important pros and cons of FHA loans.

Benefits of FHA loans

Low credit score requirements 

You may qualify for an FHA loan with a credit score as low as 500. However, most lenders require a minimum score of 580, which is still lower than the conventional loan minimum of 620. The higher your credit score, the more favorable your loan terms will likely be.

Low down payment requirements

A 20% down payment is considered ideal for most types of loans, but FHA loans are available with down payments as low as 3.5% of the purchase price. 

Competitive interest rates

Interest rates on FHA loans are comparable to conventional loans, but rates are sometimes lower for FHA loans since they have a lower base interest rate. This is because the government backing makes FHA loans lower risk to lenders. But the interest rate you’re offered is based on your full financial profile and mortgage insurance. 

No prepayment penalty

Some mortgages have penalties for paying off the loan early. FHA loans can be paid off at any time, including for reasons like refinancing and selling the home. Paying off your mortgage early can help you save money that would have otherwise been spent on interest.  

Down payment assistance

There are a wide range of down payment assistance programs that can be applied to FHA loans. This includes grants, down payment aid and closing cost assistance. If you have a credit score below 580, you may need a down payment of 10% to qualify. Being able to qualify for down payment assistance could help you secure the financing you need to buy the home of your dreams.

Disadvantages of FHA loans

Mortgage insurance premiums (MIP)

All FHA loans require homeowners to carry mortgage insurance in case of loan default. This includes both an upfront, one-time premium at closing, as well as ongoing monthly premiums paid alongside your monthly mortgage payment. Buyers who put down at least 10% of the purchase price must pay MIP for 11 years, after which the payment is removed. Buyers with lower down payments must pay MIP for the duration of the loan. 

Limited loan amounts

There are limits to how much you can borrow with an FHA loan. The amount varies by location, based on the cost of living in that location, and is updated yearly. Check the FHA loan limits in your area.

For homeowners 62 years and older considering a reverse mortgage, or home equity conversion mortgage (HECM), keep in mind this loan option has its own FHA loan limits.

Property requirements

The Federal Housing Administration wants to ensure the home you’re seeking to buy is safe to live in, so there are certain criteria the home must meet. Homes in need of significant repair, including issues like damaged foundations, exposed electrical systems, lead paint, and inadequate ventilation, won’t qualify for an FHA loan. 

If you plan on buying a condo, you'll also need to choose from an FHA-approved condo list. Condos can present additional risks, and the FHA wants to ensure the condominium meets their standards for safety and habitable living.

Is an FHA loan right for you?

FHA loans can help many interest renters become homebuyers, and even homeowners unlock the financing they need to make a repair that will improve their living conditions or make their home more energy efficient. Homebuyers interested in purchasing a fixer upper can also explore a FHA construction loan. While there are pros and cons to FHA loans, this is a common theme among all the various mortgage options out there. If you have questions about your loan options or want to learn more about FHA loans, speak with one of our professional loan officers at Zillow Home Loans*. You can even get pre-qualified for a mortgage in as little as five minutes, with no impact on your credit.

*An equal housing lender. NMLS #10287