Mortgage 101: Is an FHA loan right for you?

FHA loans are popular options because they allow borrowers to purchase a home with a relatively small down payment, and they are typically easier to qualify for than other loan types. While there are many advantages to FHA financing, they’re not the best option for everyone. If you have a good credit score and are able to make a 20 percent down payment, then a conventional loan might be a better option. Before deciding if an FHA mortgage is right for you, it’s important to understand what an FHA loan is and the possible benefits and drawbacks to this type of financing.

What is an FHA Loan?
An FHA loan is a mortgage that is insured by the Federal Housing Administration. The actual loan is funded by a traditional mortgage lender, but FHA backing means the lender is protected if the borrower defaults on mortgage payments. FHA-insured loans are less risky for lenders, allowing them to offer more lenient qualification standards. Because FHA loan programs offer easier qualifying guidelines than many other loan types, they can be a good option for borrowers who have poor credit or who may not have the funds to make a large down payment. Let’s take a look at some of the advantages and disadvantages of FHA loans.

Advantages of an FHA loan :

• Easier to qualify – An FHA loan have more lenient qualifying requirements than a conventional loan and is typically one of the easiest types of mortgage loans to qualify for.

• Low down payment –  An FHA loan only requires a 3.5% down payment, while a larger down payment is required for most conventional loans.

• Less challenging credit requirements– The FHA insures loans for people with low credits scores. If you have less than perfect credit or have had financial problems, it may be easier to qualify for an FHA loan than a conventional loan.

• Closing costs may be covered – FHA loans allow sellers to pay some of the borrower’s closing costs and fees.

• No prepayment penalty – FHA loans do not penalize borrowers for repaying the loan early, while some conventional loans carry prepayment penalties.

Disadvantages of an FHA loan:

• Loan Limits – There are maximum mortgage limits for FHA loans that vary by state and county. Depending on the area, an FHA loan may not be available for more expensive properties.

• Mortgage Insurance Premiums – Two mortgage insurance premiums are required on all FHA loans: an upfront premium paid at closing and an annual premium, which is figured into your monthly mortgage payment. With a conventional loan, mortgage insurance is only required if you make a down payment of less than 20%.

• Must use an FHA-approved lender – Not every lender participates in the FHA program. If you want to obtain an FHA-backed mortgage, you must work with a lender that is approved to process FHA-insured mortgages.

• Occupancy Requirements – The borrower must use the home as their primary residence in order to qualify for an FHA loan.

• Inspection Standards– A home must go through a property standards inspection to qualify as an FHA- eligible property.