FHA Mortgage Pros and Cons

Low Down Payment

The FHA mortgage program enables home buyers to purchase a home with a down payment low as 3.5%, significantly lower than the 10% - 20% down payment required by many standard mortgage programs.  Saving money for a down payment can be one of the biggest obstacles to buying a home so the program can be very useful for people with limited funds.  While the FHA program requires a 3.5% down payment, borrowers can combine the program with a gift or down payment assistance program to buy a home with no personal financial contribution.  For example, you could use a $96,500 FHA loan and a $3,500 down payment grant to buy a $100,000 with minimal personal funds.   By reducing the down payment and personal financial contribution required to buy a home, the FHA program makes home ownership more affordable for more people.

Low Mortgage Rate

Flexible Borrower Qualification Requirements

The FHA mortgage program uses more flexible borrower qualification requirements including a lower minimum required credit score and a potentially higher debt-to-income ratio. The minimum credit score required to qualify for an FHA mortgage is only 500 if you make a down payment of at least 10% and 580 if your down payment is between 3.5% and 10.0% of the property purchase price.  And if you make a down payment of at least 10% of the property purchase price, the minimum required credit score is as low as 500.

No Property Location Requirement

Some low or no down payment mortgage programs require the property you are buying to be located in a certain area to qualify for specific elements of the program.  For example, borrower income limits may apply if the property is located in one area but the limits do not apply if the property is located in a different area.  The FHA mortgage program does not have a property location requirement, making it simpler to use.  The program applies to one-to-four unit owner-occupied properties located anywhere in the United States.

No Borrower Income Limit

The program does not apply a limit to how much money a borrower can earn.  Several other low or no down payment mortgage programs use a maximum income limit to determine borrower eligibility. By not using a borrower income limit, the FHA program is accessible to more potential home buyers.

FHA Mortgage Insurance Premium (MIP) Makes the Loan More Expensive

FHA mortgage program participants are required to pay an upfront and ongoing monthly FHA mortgage insurance premium (MIP).   FHA MIP pays for insurance that protects lenders in the event that borrowers default on their mortgage.  Although it can be added to the mortgage amount, the upfront fee increases your closing costs while the ongoing monthly fee increases your total monthly housing expense.  The upfront FHA MIP for most mortgages is 1.75% of the loan amount while the ongoing MIP depends on the loan amount, loan-to-value (LTV) ratio and mortgage term.

FHA Loan Limits

There are limits on the size of loan you can obtain through the FHA mortgage program.  FHA loan limits vary by county and by the number of units in the property being mortgaged.  In the contiguous U.S., loan limits for a single unit property such as a home or condominium range from $472,030 to $1,089,300 for high cost areas and the limit for a four unit property ranges from $907,900 to $2,095,200.  In Alaska, Hawaii, Guam and the U.S. Virgin Islands loan limits range from $1,633,950 for a single unit property to $3,142,800 for a four unit property.  Home buyers who live in more expensive areas of the country may find that the loan limits restrict their housing options.  FHA loan limits are less of an issue for borrowers looking to buy less expensive homes.