What are the pros and cons of FHA loans?

FHA homebuyerThe pro side of an (203B) FHA loan includes a low down payment, lower credit score requirement & less cash at closing. The interest rate tends to be lower than other mortgages. The con side of the FHA loan is the monthly mortgage insurance. It never goes away; and there's an upfront FHA funding fee. The loan limit is lower is less than a conventional mortgage in most US counties.

There are three types of government mortgage loans that are available to prospective home buyers; FHA, VA and USDA. The federal government does not "make" or originate mortgage loans, but provides default insurance to lenders who offer government backed mortgages. Lenders are more willing to extend mortgages to home buyers with lower down payments and low credit scores because of the default insurance. The goal of the government backed insurance program is to promote home ownership for home buyers who require a low down payment or cannot meet the lending requirements of traditional mortgage programs. The FHA loan gives low to moderate income borrowers a chance at home ownership.

See if you are eligible for an FHA loan at LendingTree.com!

Are FHA loans assumable?

Yes, all FHA mortgages are assumable, although the conditions under which an FHA mortgage may be assumed is dependent on when the mortgage was taken out. Generally, FHA mortgages beginning before December 1, 1986 do not contain any restrictions on assumability. Some FHA mortgages that closed in 1986 through 1989 can contain language specific language regarding assumption. FHA mortgages that closed on or after December 15, 1989 require the borrower to meet credit qualification. The assumption should be handled by an approved FHA lender. FHA Assumption.pdf

Are FHA loans good?

FHA loans are very good! The down payment requirement on an FHA home loan is only 3.5% and the seller can pay a large percentage of the buyer’s closing costs. The FHA loan allows for down payment and closing cost gift money. FHA loans are a very good way to finance a home.

Are FHA loans only for first time home buyers?

Many home buyers think the FHA loan program is only for first time home buyers. It's not. The FHA mortgage is available to first and non-first time home buyers. Home buyers must have an acceptable credit history, are currently employed and have been employed for a least 2 years (there are some exceptions) and meet other sensible approval guidelines. The approval requirements are a bit more stringent with conventional/conforming mortgages. Read more - FHA Loan Qualifications

Are there disadvantages of the FHA Home Loan?

The Federal Housing Administration sets a borrowing limit. The maximum mortgage limit is established for each US county each year by Congress. The typical lending limit for a single family home and approved FHA condominium is $294,515. There are exceptions for high cost counties. The FHA program has higher limits for 2, 3 and 4 unit owner occupied properties. See FHA Limits Look Up

The second disadvantage is that selling a home to a buyer using an FHA-insured loan may cost the seller more money than if the buyer used more traditional financing. The reason is due to the stricter appraisal requirements. Sellers must remediate flaky lead based paint and meet other construction standards. The third disadvantage to FHA loans is the mortgage insurance premium (MIP). The additional upfront cost increases the loan amount (if financed) and thereby increases the monthly mortgage payment. The monthly mortgage insurance cannot be removed even with a down payment of 20%. In spite of the limitations, the FHA loan is the best mortgage for credit and cash strapped home buyers who cannot get conventional financing.

Can a FHA loan be used for mobile home?

The Federal Housing Administration will permit home loans on "mobile homes", although the FHA prefers the term "manufactured homes". In addition to the standard appraisal guidelines the mobile home must meet the following conditions:

  • be built and remain on a permanent chassis
  • be classified as real estate
  • be constructed after June 15, 1976, in conformance with the Federal manufactured home construction and safety standards (as evidenced by an affixed HUD Certification Label or a letter of label verification issued on behalf of HUD). Manufactured homes produced prior to that date are ineligible.
  • be designed to be used as a dwelling with a permanent foundation built to FHA criteria
  • have a floor area of not less than 400 square feet
  • the finished grade elevation beneath the manufactured home or, if a basement is used, the grade below the basement, shall be at or above the 100-year flood elevation.

    In addition, the mortgage must cover both the manufactured unit and its site and shall have a term of not more than 30 years.

Can FHA loans have a cosigner?

The FHA loan program permits a cosigner. A cosigner can significantly help the primary home buyer obtain an FHA home loan Read more - FHA cosigner

Can I qualify for an FHA loan?

The FHA home loan is one of the easiest mortgages to qualify for. The FHA loan is backed by the federal government which allows lenders to reduce lending restrictions. The minimum credit score is 580 with the minimum down payment, however, the FHA will allow a 500 credit score with a 10% down payment. There is a two year work requirement, although there are some exceptions to the work prerequisite. An FHA approved mortgage lender will be happy to discuss whether you meet the FHA loan guidelines.

Can the down payment on FHA be a gift?

Yes, provided that the donor(s) meet the FHA guidelines and will sign a gift letter.

Can FHA down payment be a gift?

The FHA permits the down payment to be "gifted" from eligible donors.

Can the lender pay my closing costs?

Yes! Lenders may pay a borrower’s closing costs, and/or prepaid items by “premium pricing.” Closing costs paid in this manner do not need to be included as part of the seller contribution limitation.

(h) Premium Pricing on FHA
Premium Pricing refers to a credit from a Mortgagee for the interest rate chosen.

Premium Pricing may be used to pay a Borrower ’s actual closing costs and/or prepaid items. Closing costs paid in this manner do not need to be included as part of the Interested Party limitation.
The funds derived from a premium priced Mortgage :

  • must be disclosed in accordance with RESPA ;
  • must be used to reduce the principal balance if the credit amount exceeds the actual dollar amount for closing costs and prepaid expenses ; and
  • may not be used for payment of debts, collection accounts, escrow shortages or missed Mortgage Payments, or Judgments.

SOURCE (page 224) - FHA Underwriting Manual


Can FHA loans be refinanced?

The Federal Housing Administration does not place any restrictions on refinancing FHA loans. In fact, the FHA offers a great refinance program for homeowners who want to reduce their interest rate or term. Read more - FHA streamline refinance 

Home with an FHA loanCan I buy foreclosure with FHA loan?

Home buyers can use an FHA loan to buy a foreclosure providing that the foreclosed home meets the FHA appraisal guidelines. If the foreclosure is a HUD home (an FHA foreclosure), the home must carry the "insurable" label. This means that the FHA will permit an FHA loan on the property. Read more - FHA foreclosures.

Can I get an FHA loan with bad credit?

The FHA mortgage program will accept credit score as low as 580, however, most lenders usually require a minimum credit score of 600 - 620. FHA lenders are permitted to require higher credit scores. The FHA is also more lenient with Chapter 7 bankruptcy. Other advantages of the FHA home loan program include easier income requirements and permits down payment and closing cost assistance from relatives and close friends. In fact, it is possible to have the entire down payment and closing costs paid for by relatives and close friends. The home seller is permitted to pay a percentage of the buyer's closing costs (seller assist). The FHA program also permits co-borrowers (co-signers) to help the home buyer qualify for the mortgage.

Do FHA loans have points?

FHA loans do not require loan points, although the home buyer may obtain an FHA loan structured with loans points to reduce the annual interest rate. The home seller is not obligated to pay the buyer's loan points unless agreed to and stated in the sales contract. Read more - Should I pay points?

Do FHA loans require pmi?

FHA loans require pmi, however, the term is "MIP", mortgage insurance premium for FHA loans. Read more - FHA funding fee mip explanation

Does the FHA allow seller rent back?

It's not uncommon to allow the seller to remain in their home past settlement to accommodate the seller because of delays in arranging a mover, closing on their home, or an employment transfer. Can the buyer arrange a rent back lease with the seller after settlement? According to the Federal Housing Administration, "At least one borrower must occupy the property within 60 days of signing the security instrument and intend to continue occupancy for at least one year."

Does the FHA require cash reserves?

For loans that are manually underwritten, the FHA requires a 1 month cash reserves after closing for one and two unit properties (principal & interest, taxes, insurance). If the loan is underwritten by an Automated Underwriting System (AUS), the "findings" determine the cash requirements, if any.

For three to four unit properties, the FHA reserves the equivalent to three months’ Principal, Interest, Taxes, and Insurance (PITI) after closing.

In conclusion, if you have a down payment of 10% or more, a higher than average credit score, lengthy employment history, the conventional mortgage is best. But, if your credit score is closer to 600 than to 700, you need seller paid closing assistance, family gift money or co-signatures, you should seek an FHA home loan.