The Federal Housing Administration (FHA) mortgages are designed to help people with lower incomes become home owners. Tight lending requirements make it difficult for people with low incomes, less than perfect credit scores, and tight financial situations to obtain a conventional loan. The Federal Housing Administration insures the mortgage loan against default, so in the event that the borrower can’t make mortgage payments anymore, the FHA will pay.
Pretty much anyone can qualify for an FHA mortgage loan, but the amounts that you can borrow are usually close to median home prices in the area. In order to qualify for this type of loan, your debt to income ratio should be fairly reasonable and you should have a good credit score.
FHA Mortgages- Pros
FHA mortgage loans are not for everyone, but they do have a few advantages over conventional loans. FHA loans make it easier for people who can’t normally afford a conventional mortgage loan to become a home owner. Here are the most important pros of taking out an FHA mortgage loan:
- It is easier to qualify for an FHA mortgage loan than for a conventional mortgage loan. Conventional mortgage loans have strict qualification requirements, making it harder for people with low to medium incomes and not so perfect credit scores to qualify. FHA mortgage loans, on the other hand, are designed by the government to help these people, by having less strict income and credit score requirements.
- FHA loans require a much smaller down payment than conventional loans. Regular mortgage loans require a 20 percent down payment in order to avoid paying for insurance. 20 percent of a loan value can be a pretty hefty chunk of money, depending on how much your mortgage loan is for. Down payments for an FHA mortgage loan can be as low as 3.5 percent, making it easier for more people to become home owners.
- FHA loans don’t come with a pre-payment penalty. Many conventional loans come with a pre-payment penalty, meaning that you will have to pay a penalty fee if you decide to pay off your loan before the end of its term. FHA mortgage loans don’t come with such a penalty, so you can pay off your loan or refinance at any time.
FHA Mortgages- Cons
FHA mortgage loans are designed to help people who can’t otherwise afford a conventional mortgage loan. Because of this, FHA loans come with a few cons, as well. Here are the most important:
- You can’t borrow as much money as you would with a conventional loan. Because the Federal Housing Administration insures these loans, they will have to pay in case the borrower defaults. That’s why the amounts that you can borrow are lower than what you would be able to borrow on a conventional loan.
- Many sellers don’t want to deal with buyers using an FHA mortgage loan. When the housing market is hot, sellers in a sellers’ market receive multiple offers on their properties. FHA mortgage loans are seen as a hassle by sellers, so your offer might be refused just because the seller doesn’t want to deal with an FHA loan.
- You will have to pay a mortgage insurance premium. Conventional loans require the borrower to pay private mortgage insurance if the down payment is lower than 20 percent. FHA insured mortgage loans require an initial insurance payment of 1.5 percent of the loan value, and a monthly mortgage insurance premium of .5 percent of the loan value.
Mortgages backed by the Federal Housing Administration are a great way for those with lesser means to become home owners. Depending on each borrower’s situation, this type of loan can be a good or a bad choice. It is up to the home buyer to evaluate his or her financial situation and decide if an FHA loan is the best choice, or it would be better to look for a more conventional loan.