FHA financing is a popular choice for many homebuyers for a variety of reasons. There are unique challenges to this option, so home buyers should be aware of the benefits and drawbacks. Let’s look at the pros and cons to FHA financing so you are better informed about your options for purchasing a home.
The Advantages of FHA Financing
Less money upfront FHA financing requires a 3.5% downpayment, while conventional financing usually requires a minimum 5% down. FHA financing does not require additional savings after purchase. Conventional financing requires that the buyer has at least two months of mortgage payments in reserve after closing. FHA buyers can often buy homes with less money upfront because of the lower requirements.
FHA Financing has More Flexibility in Credit History FHA financing usually allows for more flexibility for credit histories that are less than perfect. Conventional financing requires that credit history is established and there are no exceptions for credit damage like late payments or collections. FHA offers more flexible guidelines that can be helpful to buyers whose credit history is less established or who have had some difficulties.
The Ability to Purchase a More Expensive House If you are within FHA’s maximum loan amount, FHA financing is normally able to allow for a higher ratio between bills and income than conventional financing. This applies to buyers with average credit to very good credit. FHA buyers can be approved for larger loans than conventional homebuyers in certain situations.
The Disadvantages Of FHA Financing
More Paperwork Due to the Federal Housing Administrations guarantee for FHA loans, additional paperwork is required to both approve and close an FHA mortgage. Although this is a minor inconvenience it is something home buyers should be aware.
Higher Property Standards – The Federal Housing Administration is very concerned about the safety and soundness the properties it finances. They hold these properties to a higher standard that conventional financing usually requires. Before making an offer on a property with FHA financing, the buyer should speak with their lender to find out if the home has any particular features that could make it ineligible.
Higher Mortgage Prices- FHA currently charges an upfront premium of 1.75% to homeowners for mortgage insurance. The buyer has the option to finance this cost or pay it at closing. However, it will still need to be paid. FHA financing has higher monthly mortgage insurance fees than conventional financing. The upfront cost and the monthly cost of FHA financing can change frequently so homebuyers should consult their lender to find out what the charges are for their property and how they compare to conventional mortgage insurance.