There are a few pros and cons to consider before applying for an FHA home loan. As a first time home buyer, you may benefit from the low down payment requirement of 3.5%. You may also qualify if you have a lower credit score than what is typically required for conventional loans. However, keep in mind that you will be required to pay both an upfront and monthly mortgage insurance premium. Additionally, the maximum loan amount you can borrow is capped at 96.5% of the appraised value or sale price of the home – whichever is less.
Another pro to consider is that FHA loans allow for a higher debt to income ratio than conventional loans. However, this may not necessarily be a good thing depending on your financial situation. You should always carefully consider whether you can afford the monthly payments before taking out any loan – no matter what the terms are.
The final pro is that the PMI (private mortgage insurance) rate for FHA loans is lower than it is for conventional loans. However, this is only if you put down less than 10%. If you put down 10% or more, the PMI rate is the same for both types of loans.
The Pros of FHA Home Loans
Great For First Time Buyers
One of the best things about FHA home loans is that they’re perfect for first time buyers. If you’ve never owned a home before, the idea of trying to get a conventional loan with a 20% down payment can be pretty daunting. With an FHA loan, you only need 3.5% for a down payment – which can come from a family member, employer, or other approved source.
Low Down Payment
Another great thing about FHA home loans is that they have a low down payment requirement – only 3.5%. This can make it much easier to save up for the down payment, especially if you’re a first time home buyer.
Lower Credit Score Requirements
One of the best things about FHA home loans is that they have lower credit score requirements than conventional loans. This can be great news if your credit score isn’t perfect. With an FHA loan, you may still be able to qualify for a loan with a credit score as low as 580.
Allows a Higher Debt to Income Ratio
One of the best things about FHA home loans is that they allow for a higher debt to income ratio than conventional loans. This can be great news if you have a lot of debt, but still want to buy a home. With an FHA loan, you may be able to qualify for a loan with a debt to income ratio as high as 50%.
Lower PMI Rate
One of the best things about FHA home loans is that they have a lower PMI rate than conventional loans. This can be great news if you’re putting down less than 10%. With an FHA loan, you’ll only have to pay 1% of the loan amount for PMI. On a $200,000 loan, that would be $2,000. With a conventional loan, you would have to pay 2% – which would be $4,000 on a $200,000 loan.
The Cons of FHA Home Loans
Upfront Mortgage Insurance Premium
One of the biggest drawbacks of FHA home loans is that you have to pay an upfront mortgage insurance premium when you take out the loan. This can add hundreds or even thousands of dollars to your loan amount.
Condo loans must be FHA approved
If you’re looking to buy a condo with an FHA loan, you’ll need to make sure that the condo is on the list of FHA approved condos. If it’s not, you won’t be able to get an FHA loan for your purchase.
FHA loan limits are based on areas
Another drawback of FHA home loans is that they typically have higher interest rates than conventional loans. This can add up over time, and make your loan more expensive.
Maximum Loan Amounts
Another drawback of FHA home loans is that there are maximum loan amounts. In most areas, the maximum loan amount is $294,515. This means that if you’re looking to buy a home that’s more expensive than that, you won’t be able to get an FHA loan.
FHA loans can only be used on primary residence
Another drawback of FHA home loans is that they can only be used for your primary residence. This means that you can’t use an FHA loan to buy a second home or investment property.
Higher interest rates than conventional loans
One of the biggest drawbacks of FHA home loans is that they typically have higher interest rates than conventional loans. This means that you’ll end up paying more interest over the life of the loan.
FHA loan limits are based on areas
Another drawback of FHA home loans is that they typically have higher interest rates than conventional loans. This can add up over time, and make your loan more expensive.
The process of the loan is a little harder to get final approval
The process of getting an FHA loan can be a little more difficult than getting a conventional loan. This is because there are more requirements that you’ll need to meet.
Closing Costs
Another drawback of FHA home loans is that you may have to pay closing costs. This can include things like appraisal fees, loan origination fees, and title insurance. Closing costs can add up, and make your loan more expensive.
The Bottom Line
FHA home loans can be a great option for some people. However, they’re not right for everyone. Make sure you understand the pros and cons of FHA home loans before you decide if they’re right for you.
Wherever you are in your journey on deciding which type of loan type might be best for you, remember to start by checking to see what you qualify for here. Hope this helps!