FHA Loan Pros and Cons List

Banks loan money to individuals to purchase homes. Some of these banks are approved by the Federal Housing Administration (FHA). The loans that are offered by these banks are insured by the FHA to reduce bank risk on loans if the borrower finds himself in default.

The federal government created this agency in the 1930’s, after a large number of foreclosures and loan defaults occurred. The intent was to make loans affordable for citizens through insuring the loans for the banks. FHA loans are popular for first-time home buyers and others.

Pros of FHA Loans

Individual credit ratings do not have to be as well established to be awarded an FHA loan. It is easier to obtain one of these loans. The down payment for an FHA loan is also lower, at 3.5 percent. This is an advantage over a standard loan that requires 20 percent down payment. Also those who do not qualify for private mortgage insurance should look into FHA loans. If the buyer decides to sell their home the loan can be ‘assumed’ by the purchaser. Even individuals who have low or bad credit, or have filed a bankruptcy or had a foreclosure may be able to gain an FHA loan.

Cons of FHA Loans

Due to the lack of strict requirements on an FHA loan, banks require up-front insurance premiums and monthly payments for insurance. Homes that are purchased under FHA guidelines also require up-front appraisals, meaning that the home that is to be purchased must be in good condition to be approved for the loan.

The upfront mortgage insurance premium (MIP) is rated at 1.75% of home value, no matter the buyer’s credit score. For example, if the home to be purchased costs $100,000.00, the upfront MIP would be $1750.00. This cost can either be paid upfront, as part of the closing costs, or it can be integrated into the total mortgage costs.

The annual MIP is another insurance premium that is charged on a month-to-month basis and is included in the mortgage payment. This rate is not a fixed percentage, but instead is determined by the borrower’s loan-to-value (LTV) ratio, the size of the loan and how long the loan is contracted for. Buyers with a 15 year loan will have a different LTV than those with over a 15 year loan.

What You Need to be Approved

You might find that there are benefits or detriments to FHA loans that include requirements by the bank. You need to have verifiable income and you need to have been in your current job for two years or more. You have to be an American citizen with a valid Social Security Number. You must pay the down payment of 3.5 percent. Only primary residents, those living in the house, can acquire an FHA loan. You cannot get one for a home you rent out to others. There are more requirements that might keep one from obtaining an FHA loan, but it is worth the act to look into them if you are seeking to purchase a first-time home.