What is an FHA Loan?

An FHA loan is a mortgage that is insured by the FHA (Federal Housing Administration). The FHA does not administer the loan; they simply insure the loan and offer financial assistance if you fall behind on your mortgage payment. Each year, thousands of Americans rely on the FHA to help them receive a reasonably priced mortgage with a low down payment.

 

Benefits of an FHA Loan

Three major benefits of an FHA loan include:

  • Low Down Payment: Conventional mortgages generally require a 20% down payment. If you cannot afford such a large out-of-pocket sum, you can apply for an FHA loan, which requires as little as 3% down. Your down payment can even be a gift from a family member or charity. For first-time buyers who are just starting out, or for those living on a low or fixed income, an FHA loan is an attractive option.
  • Easy Qualifying: If you have poor credit, it may be difficult for you to qualify for a traditional home loan. The FHA helps individuals with poor credit by having lax eligibility requirements, so that even those who have declared bankruptcy or have had a home foreclosed on in the past can still qualify.
  • Competitive Rates: FHA loans have comparable interest rates to conventional loans, which is a great perk for borrowers.

 

Disadvantages of an FHA Loan

The major disadvantage of an FHA loan is ironically associated with one of the main advantages. Since your down payment is much lower with an FHA loan, you will have to pay more private mortgage insurance (PMI) over a longer period of time. You will pay an initial PMI fee, and then a monthly PMI payment that can become costly over time. The more you're able to put down on your house up-front, the more equity you'll build and the less you'll have to pay in private mortgage insurance. Therefore, if you can afford the 20% down payment of a conventional loan, you're better off doing that and paying less PMI.

 

Though FHA loans have tax credit qualifications, they do have a few requirements. These include limitations on the total amount you can borrow as well as limits on the types of homes that are eligible.