FHA Loan Benefits and Disadvantages
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When purchasing a home or refinancing, getting a free credit report and score aren’t the only things to consider. Borrowers should understand the difference between an FHA loan and a Conventional loan. This post will focus on the details of FHA loans and the distinct benefits (and disadvantages) they afford borrowers.
Benefits of FHA Loans
Here are the reasons an FHA loan might be right for you.
- The biggest advantage of FHA loans is that they are guaranteed by the Federal Housing Administration. This backing significantly reduces the risk for lenders, and in turn, makes it easier for borrowers to qualify.
- FHA loans require less money up-front for closing costs and the down payment can even be gifted from family, non-profit, or a government agency.
- Conventional loans require private mortgage insurance (PMI) until you pay off approximately 80% of the loan. FHA loans have a similar insurance premium, however it’s cheaper than PMI. That means your monthly payments will be less.
- FHA loans are assumable. When you sell the property, the new owner doesn’t need to obtain a new loan, they simply take over your loan. This is a great benefit if your interest rate is lower than what is currently available.
- FHA loans are more accommodating concerning credit. You can still be denied if you have bad credit, but borrowers with no credit often qualify for FHA loans over Conventional loans.
- Refinancing an FHA loan is much easier. Refinancing an FHA to another FHA loan doesn’t require a home appraisal and doesn’t incur any out of pocket expenses. It’s all apart of the Streamline Refinance process.
- There are programs that allows homeowners to incorporate the cost of adding energy-efficient features into their home purchase or refinance.
Disadvantages of FHA Loans
There are a few down sides to FHA loans.
- FHA loans require an up front insurance premium of 1.5% of the mortgage amount. These costs are usually included into the loan and reduce the equity you’d otherwise gain from the down payment.
- There are limits to the maximum amount you’re allowed the borrow. The limits are dependent on where you live. Check the limits in your location.
- The mortgage insurance will typically last longer. You have to maintain the insurance until you’ve paid off 22% of the principal. This isn’t too different from Conventional loans, however FHA loans don’t incorporate any appreciation in the home’s value.
What do you think? What kind of loan do you have?
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3 Responses to FHA Loan Benefits and Disadvantages
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May 16th, 2009 9:30 pm
When I bought my house all those years ago, I had a FHA mortgage. I think the FHA mortgage is better for people who are buying their first house and can’t afford to put a lot of money down on the house. I never did understand the thinking behind getting TWO mortgages… one for 80% of the loan and one for the other 20%.
May 17th, 2009 11:41 am
Locking in an assumable loan in this market is fantastic. Interest rates will have to go back up to a higher equilibrium point as the economy improves. If a buyer is able to assume your loan, this would be a huge selling feature.
May 18th, 2009 3:21 pm
@Sandy,
People often split the mortgage into two loans to avoid private mortgage insurance (PMI). They save some by splitting but often the second loan has a much higher interest rate.