The pros and cons of FHA loans


Whenever you look for a mortgage loan, you would certainly have stumbled upon the word FHA loans. Moreover, you would have heard that if you are purchasing your first house, then FHA loan is good for you. However, is this thing true even today? 

If you do not understand anything about FHA loan and want to know about it, then this is the right place for you. Here, you will get to know about FHA loan, along with its various pros and cons. This will in turn help you to decide whether FHA home loan is the best for you or not. 

What are FHA loans?

The full form of FHA is Federal Housing Administration. This company provides mortgage insurance on loans, which are created by the lenders approved by FHA in the United States as well as its territories. Here, you must notice that the FHA itself does not lend money to you. Instead, it just reduces the financial risk of the lender by insuring the loan. 

Founded in 1934 by the US Congress, FHA is the largest mortgage insurer across the world, with more than 34 million insured properties at present. In 1965, FHA became a part of the Office of Housing of US Department of Housing and Urban Development (HUD). One interesting thing about FHA is that it is a sole government agency, which uses self-generated income for its functions and does not use the money of taxpayers. 

You must know that FHA mortgage insurance gives the lender protection against losses, in case a homeowner fails to pay for his or her mortgage loan. This in turn eliminates the risk of the lender, as the FHA will pay him or her, in case a homeowner does not pay. Additionally, FHA insures mortgages on multifamily as well as single family homes, including hospitals and manufactured homes. 

Advantages of FHA loans

Image courtesy: Investment Juan-01
Image courtesy: Investment Juan-01

One of the chief advantages of FHA loan is that you do not have to make a huge down payment (that can be even 3.5 percent of the price of purchase) for a loan insured by FHA. On the other hand, many conventional loans require an early payment of 20 per cent of the property price. And, generally college graduates, first-time homeowners, people with low income, and newlyweds cannot afford a down payment of 20 per cent. 

A loan insured by FHA is perfect for people who have not saved sufficient money for the purchase, as FHA loan only requires a minimum investment of cash. People who are denied a traditional loan and first-time home purchasers certainly benefit from a loan insured by FHA. Additionally, if you cannot apply for traditional loans due to foreclosure or bankruptcy, you can still be eligible for FHA loan. 

Loans by FHA are quite popular, as they offer greater flexibility, when it comes to calculating household income and payment ratios. In brief, if you want to qualify for FHA loan, then you should be a resident of the United States, be old enough to get your state’s mortgage, and have a legitimate social security number.

Disadvantages of FHA loans

You can pay more interest on your FHA loan, as its down payment is very low, as much as 3.5 per cent as compared to if you take a traditional loan with a down payment of 20 per cent. This factor plays an important role, when you are searching for a mortgage. 

Image courtesy: Pixabay
Image courtesy: Pixabay

If you are monetarily capable of paying down payment of 20 per cent, then you must strongly think about and go for a traditional mortgage, as in the future, it will save your money. Moreover, you cannot cancel the yearly mortgage insurance premium on FHA loan, in addition to paying 1.75 per cent in insurance. On the contrary, traditional loans allow you to cancel the policy of insurance, when you have adequate equity. 

Now that you know what are FHA loans as well as their pros and cons, you can take a sound decision, as to whether you should opt for FHA loan or not.