Pros and Cons of FHA Loans

FHA loans can be a great way to purchase a home, but they do come with some downsides. So before you decide on an FHA loan, understand what you’re getting yourself into. While there are many benefits associated with FHA loans, there are also some drawbacks that should be considered before applying for one.

pros and cons of fha loans

Pros and cons of FHA loans:


  • Lower down payment. With an FHA loan, you can make a down payment as low as 3.5% on a single-family home purchase.
  • Flexible credit requirements. If you have bad credit, it could still be possible to qualify for an FHA loan program, although it will likely take longer than normal to build your credit score up again after the application process is complete. You may also need to pay mortgage insurance premiums (MIP) up front and annually while you’re still paying off your home loan balance—this can add up quickly in some cases!


  • High insurance costs—FHA loans carry high premiums due to their “insurance” nature; these payments must be made every month until they are paid off by either yourself or whoever took out the original mortgage with them still being paid monthly throughout all periods of ownership unless otherwise agreed upon beforehand between lender(s) involved in financial transaction itself before being finalized at closing date which happens within 30 days after applying successfully through process taking place after filling out paperwork correctly according with guidelines set forth by law officials overseeing entire operation process itself so there’s no way around them unfortunately except maybe

Lower down payment

To find out if you qualify for an FHA loan, contact a mortgage expert today!

Flexible credit requirements

When it comes to FHA mortgages, you can get approved with a credit score as low as 500. As long as your score is above 580, though, you’ll be able grow your credit more quickly because you won’t be paying higher interest rates just because of the lower limit on your credit score. In fact, if you have a good income and assets but not much in terms of traditional debt (student loans, for example), an FHA loan can provide options that other loans simply won’t offer.

Lastly, it’s important to note that there are some drawbacks associated with FHA loans: they often require mortgage insurance premiums that last for up to ten years (which means higher monthly payments). They also have strict guidelines regarding who may qualify and what types of properties they allow borrowers purchase.

Low interest rates

The interest rate on your home loan is determined by the creditworthiness of the borrower (you) and the value of the property being purchased. The lower your credit score and income, and higher cost of living, will lead to a higher interest rate.

Lowering Your Monthly Payments

If you are refinancing your existing mortgage into an FHA insured loan, this could lower your monthly payments because they typically have lower closing costs than conventional loans. However, there is also an upfront mortgage insurance premium that must be paid in addition to closing costs which can add up over time.

Available for first-time homebuyers

FHA loans are only available to first-time homebuyers, but they do have some flexible credit requirements. If you are an experienced borrower and have some equity in your home, you may still qualify for a FHA loan and should consider other options such as a VA or USDA loan.

The debt-to-income ratio of the borrower determines whether or not they can qualify for an FHA loan. A lower DTI means that there is less money going out each month, leaving more money available for other monthly expenses like housing costs. The maximum allowable DTI ratio varies depending on which county in which the borrower resides and what type of property they wish to purchase (single family home vs condo). For example:

  • For all counties except Miami-Dade County; 1) non-owner occupied properties must have a minimum of 12% down payment OR 2) owner occupied properties must have 10% down payment.*

Insured by the government

  • Insured by the government. FHA loans are insured by the Federal Housing Administration. This means that if you can’t make your mortgage payment, the government will pay it for you.
  • Available for first-time homebuyers. The FHA requires only 3% down and flexible credit requirements, so it’s easy to qualify with a low down payment and high credit score (as long as you have one).
  • Lower interest rates and closing costs than conventional loans. Conventional mortgages require 20% down and stricter guidelines when it comes to things like bankruptcy or foreclosure in your past history; they also charge more than FHA loans in terms of interest rates and fees—sometimes thousands of dollars more over time!
  • Streamline refinancing options: An increasing number of homeowners are turning to this type of loan program because it allows homeowners who’ve been struggling with their monthly mortgage payments due to medical bills or unemployment issues an opportunity not only lower interest rates but also lower debt-to-income ratios when applying for additional cash through refinances or cash out refinances so they can avoid paying points upfront on these types of programs even though there may be some upfront costs involved such as origination fees associated with taking out new loans which typically amount up between 2% – 5%.

Refinancing options

The FHA loan program offers a variety of refinancing options. You can choose to refinance your existing FHA mortgage for several reasons, including:

  • Lower your interest rate by extending the term of the loan
  • Switch from an adjustable-rate mortgage (ARM) to a fixed-rate product
  • Convert your home equity line of credit (HELOC) into an FHA loan with lower long-term costs

Less strict guidelines

FHA loans have less strict guidelines compared to conventional loans, which means you may be able to get approved for a loan with a lower credit score and higher debt-to-income ratio. However, the FHA requires an appraisal on the home you’re buying and will require a down payment that’s at least 3.5% of the purchase price or appraised value (whichever is lower). If your credit score is less than 620, you’ll need to pay for private mortgage insurance (PMI) until your score reaches 660 or above. In addition, if your down payment is less than 20%, PMI will be required until two years after closing on your loan.

Streamline refinance option

Streamline refinance option

Borrowers who have owned their homes for at least three years and meet the FHA’s other requirements are eligible to apply for a streamline refinance. This program allows you to shorten your term, lower your interest rate and even pay off some of your principal if you choose. It also eliminates the need for an appraisal or credit check as long as all payments are made on time. You don’t have to pay an upfront mortgage insurance premium either, which can save you thousands of dollars in upfront costs.

Cash-out refinance option

If you want to use your home equity to pay off other debts, consolidate them into one payment or simply have more disposable income available, a cash-out refinance may be for you. The amount of money that can be obtained through a cash-out refinance loan is determined by the current value of your property and whether any outstanding liens exist on the property. If there are no liens on your home, then the lender will consider both the total amount due on the loan and any fees associated with closing costs (such as appraisal fees).

Lower closing costs

There is no doubt that FHA loans have many benefits over conventional loans. And if you’re a first-time homebuyer who needs to make a lower down payment, then they are probably the right choice for you. But there is one more thing to consider before getting an FHA loan: closing costs.

In general, FHA loans have higher closing costs than conventional loans due to their insurance premiums and the fact that they require an appraisal at time of purchase (which can cost up to $500). However, some lenders offer discounts on these fees that can effectively reduce them by 25 percent or more.

Additionally, keep in mind that there are other costs associated with buying a home such as property taxes and homeowners insurance bills—both of which will likely be higher on an FHA loan due its additional mortgage insurance requirement (though still less than what’s required by conventional mortgages).

Help with foreclosure prevention

If you’re having trouble getting approved for a conventional mortgage loan, an FHA loan might be the right choice for you. FHA loans are available to borrowers who have been denied by other lenders or do not meet their underwriting requirements. In addition, there is no maximum credit score requirement for FHA loans—in fact, many people with very low credit scores are able to get approved for this type of mortgage.

FHA loans also allow borrowers with a history of late payments and foreclosure on their record to qualify for one-year mortgages called Streamline Refinances, which allow them to refinance into an FHA-insured loan without having any additional fees assessed against them upfront (i.e., they don’t need home appraisals). This can save money over the long run if your current lender charges appraisal fees every time you want to refinance your house in order keep track of changes in market value so that they can guarantee how much equity exists in your home at any given point during its life span; since appraisals cost money themselves ($400-$1000+), this means less paperwork required overall which saves money overall on both fronts–time spent doing paperwork versus paying out expensive fees just so someone else can tell whether or not it’s worth refinancing back again later down stream when values change again after another year has passed by.”

Lower debt-to-income ratio requirement

Another advantage of the FHA loan program is that it has a lower debt-to-income ratio requirement. The maximum ratio allowed by the program is 50 percent, which means that you can get approved for an FHA home loan even if your income is only half as much as what a conventional lender would require.

This helps first-time homebuyers because they may not have any credit history or be able to afford a large down payment on their own. However, if you have multiple credit cards and are struggling to pay them off, consider closing some of them so that you don’t end up disqualifying yourself from getting an FHA loan.

Lower credit score requirement

With an FHA loan, if you have less than perfect credit, you may still be able to get a mortgage. In fact, FHA loans are available for those who have all types of credit history including:

  • Chapter 7 bankruptcy
  • Chapter 13 bankruptcy
  • Foreclosure and short sale within the last 24 months (There are exceptions to this rule)
  • Late payments for 6 consecutive months or more in the last 12 months

Help with homeownership

FHA loans are great options for first-time homebuyers because they require a lower down payment than other types of mortgage loans. They also have flexible credit requirements, which means you can apply even if your credit score isn’t perfect or you have some past financial issues on your record. FHA loan guidelines are also less strict than other types of mortgages, making them easier to qualify for.

FHA loans allow you to purchase a house with as little as 3% down, which is an attractive feature when compared to conventional loans that require at least 20% down (and sometimes more). While there may be some costs associated with getting an FHA loan—like mortgage insurance premiums—the benefits far outweigh the drawbacks in most cases.

Available for specific types of properties

The FHA program is designed to make home buying more affordable for first-time homebuyers and those with low incomes. You’ll need to meet certain requirements in order to qualify.

  • Most FHA loans are only available for owner-occupied homes, but you can use one if you’re buying a rental property with an FHA loan or refinancing your current rental property using an FHA loan.
  • Additionally, there are some properties that aren’t eligible for FHA financing:
  • Condominiums (unless they are part of a planned community)
  • Two-to-four unit properties
  • Manufactured homes

Mortgage insurance required

  • FHA loans require that you purchase mortgage insurance, which protects the lender in case you default on your loan. The amount of mortgage insurance you must buy varies depending on several factors and varies between lenders as well. Mortgages with down payments less than 20% require more mortgage insurance (because they have higher risk).
  • The monthly cost of your mortgage insurance depends on two things: how much money it takes to cover the loss if you default on your loan, and what percentage of the loan amount is covered by private mortgage insurance (PMI), which means that some part is not covered by FHA. In general, the more money a lender has at stake in case something goes wrong with the loan, the lower their rate will be—and vice versa; so if an investor has less money at stake because they have chosen a smaller down payment or otherwise lowered their risk by using private mortgage insurance instead of FHA’s program funds then their rates might be higher than an institution who invests more heavily into government-backed loans than private ones does—even though both would require similar levels of PMI coverage per dollar owed since both types come from different sources: one being backed by federal agencies like HUD while another coming from outside parties like banks or mutual funds

High insurance costs

Mortgage insurance is required on all FHA loans. You can choose to have the premium paid by the borrower or have it added to the loan amount and paid over time.

With a conventional loan, you don’t need mortgage insurance if your down payment is 20% or more. A conventional mortgage has lower fees than an FHA loan, but comes with higher interest rates and fewer options for borrowers with less-than-perfect credit scores.

Limited loan amount

In general, FHA loans have a maximum loan amount of $417,000 in most areas of the country. However, there are some exceptions to this rule: if you live in an area with high housing costs (as determined by HUD), your loan limit will be higher than the standard $417,000. The limits for these high-cost areas range from $625,500 to more than $800,000 depending on where you live.

For example:

  • The Washington D.C.-metropolitan area has a maximum limit of $636,150
  • San Francisco has a maximum limit of $801,250

Higher interest than conventional loans

FHA loans are backed by the federal government and allow borrowers to finance a home with as little as 3.5 percent down, but they come at a cost. Because FHA loans are insured by the government, it requires that borrowers pay for mortgage insurance throughout the term of their loan.

The annual mortgage insurance premium (MIP) is an additional fee added to your monthly payment each year in order to cover potential losses from defaults on your loan. You must pay MIP until you reach 20% equity in your home, which means that if you bought a house for $200,000 and put $10,000 down, it would take at least five years before you hit 20% equity (assuming no additional money went towards principal).

This doesn’t mean that FHA loans should be avoided entirely—they can be beneficial for certain types of buyers who meet certain criteria—but they should not be considered as an option when comparing mortgages from different lenders

Appraisal required

You cannot secure a FHA loan without first having the property appraised. The appraisal is an estimate of the value of the home you are buying, and it’s used to calculate your mortgage amount. In order to obtain an appraisal, it’s possible that you may need to pay an extra fee in addition to paying your closing costs at closing.

Upfront mortgage insurance premium

Upfront mortgage insurance premium

Upfront mortgage insurance premium (UFMIP) is a one-time fee that you pay when you get your loan. Mortgage insurance companies charge this amount to protect themselves against potential losses if you default on your home loan. The fee is usually 0.5 – 1 percent of the total loan amount and is paid at closing, but it can be rolled into the mortgage balance if the lender agrees to do so. Like other closing costs, UFMIP is deducted from your down payment or added to the principal balance of your new home loan—whichever is less expensive for you financially.

Annual mortgage insurance premium

An FHA loan generally requires mortgage insurance for the life of the loan. This type of insurance protects the lender in case you default on your loan. The annual mortgage insurance premium (MIP) is based on your outstanding principal balance and can be paid in one lump sum or made monthly. It’s typically 0.5% to 1% of your original loan amount, but can be higher depending on how much money you owe on your home.

Limited refinancing options

  • Limited refinancing options
  • Limited cash-out refinance
  • Strict guidelines
  • High closing costs
  • High debt-to-income ratio

Limited cash-out refinance

You can use the money from a cash-out refinance for any purpose, such as consolidating debts or paying for a new car. You should be careful about taking out too much money, however. When you take out additional funds, you have to pay closing costs and interest on those funds—which can get expensive if you don’t have the income to cover it all at once.

Strict guidelines

You’re applying for a mortgage loan and you want to know what types of loans are available to you. That’s great! The Federal Housing Administration (FHA) offers some of the most flexible lending guidelines in order to help first-time homebuyers get into their own property. With an FHA loan, you can use it as a down payment on your home or as a supplement to make up the difference between your equity and value of the property that you want to buy.

The major pros include:

  • Lower down payment requirements
  • Flexible credit requirements
  • Low interest rates

High closing costs

Closing costs are the expenses that come with purchasing a home. These include loan origination fees, title insurance fees and other closing fees.

FHA loans generally have higher closing costs than conventional loans because of the mortgage insurance premium. FHA borrowers can expect to pay about 1% of their loan amount in up-front mortgage insurance premiums for each year of their loan term.

For example: A $100,000 FHA loan with 20% down would require an upfront MIP payment of $2,000 and annual MIPs of about $145 for each year of the loan term (a total cost over 30 years).

High debt-to-income ratio

It’s important to understand how your debt-to-income (DTI) ratio can impact your mortgage loan application. The higher the DTI, the more difficult it will be for you to qualify for financing. In general, lenders require that your DTI does not exceed 43%-50%.

For example: If your monthly income is $5,000 and you have $1,500 in monthly expenses including rent/mortgage payment (which is considered as housing expense), then 50% of your total income would be used up by housing expenses alone. This means that 30% of what remains ($2,250 / 12 months) must go towards paying off credit card bills and other debts like car loans or student loans in addition to making minimum payments on these debts each month which reduces even further the amount needed for other things like groceries or entertainment expenses during a given month.

High credit score requirement

The FHA requires you to have a credit score of 620 or better. This is one of the downsides of FHA loans because it makes them unattainable for many low-income borrowers.

The following people are eligible for FHA loans:

  • Low income individuals who can’t afford a 20% down payment on their own
  • Homeowners who want to refinance their properties but don’t want to pay expensive closing costs (more on this later)


We hope this blog has helped you understand the pros and cons of FHA loans. If you have any questions or would like to discuss this further, please feel free to contact us here. We’re always happy to help!