If you found this blog post you are probably someone that is interested in financing a home purchase or refinance with an FHA loan. I hope that this blog post does not disappoint as I present the top 5 advantages and disadvantages of the FHA mortgage loan program.
Top 5 Advantages of an FHA Mortgage
- Low Down Payment: FHA only requires a down payment of 3.5% or $3,500 on a sales price of $100,000. This allows you to keep more of your money in your bank account for a rainy day fund or for other investments.
- No Minimum Credit Score: I should put a disclosure on this one because most lenders have what’s called a “lender overlay” which requires a credit score of at least 640 for their FHA loans although I have heard that Wells Fargo will do FHA loans with credit scores down to 500. But regardless of “lender overlays”, if your credit score is less than excellent you will most likely need an FHA loan program.
- FHA Mortgages are Assumable: This could benefit you when you choose to sell your home. Let’s say that 5 years from now you want to sell your home and mortgage rates are around 7%. If you have an FHA mortgage at today’s rate (around 5%), the person buying your home can take over your mortgage at 5%. This could make your home that much more marketable when it comes time to sell.
- FHA Streamline Refinance: FHA offers the best refinance program available. Basically, if you currently have an FHA loan and have made your mortgage payments on time for 6 months, you can refinance to get a better rate without having to qualify again and without having to do another appraisal.
- FHA 15 Year 90% LTV: I wanted to mention the FHA 15 year program because it has been one of my favorite loan programs recently. The advantage of doing an FHA 15 year loan with 10% down payment or equity is that you won’t have to pay monthly mortgage insurance. All Conventional loans require a 20% down payment to get rid of mortgage insurance.
Top 5 Disadvantages of the FHA Mortgage
- Expensive Monthly Mortgage Insurance: On a 30 year fixed loan with 3.5% down payment FHA requires that you pay a monthly mortgage insurance fee of .9%. On a loan amount of $100,000 that is $75/month. Also, this is going up to 1.15% for FHA case #’s assigned after April 18th, 2011. That’s $95.83/month on a $100,000 loan. I should mention that the MI factor will decrease to 1.1% if you put 5% down or more. Big whoop!
- Upfront Mortgage Insurance: Besides the monthly mortgage insurance (see disadvantage #1), you will pay an upfront mortgage insurance fee of 1%. This fee can be financed but that means you will pay interest on that fee over the term of the loan (usually 30 years). For example, if your base loan amount is $100,000, the fee will be $1,000 making your full loan amount $101,000.
- Mortgage Insurance for 5 years Minimum: With Conventional loan programs you can appeal to have the mortgage insurance removed once your loan to value reaches 80%. With FHA mortgages, you can’t make that appeal until you have been in the loan for a minimum of 5 years. This includes people that put 20% down with their FHA loan.
- Only 1 FHA loan at a Time: Unlike Conventional, FHA will not allow you to have more than one FHA loan at a time, unless you can prove that your family has outgrown your current residence or if you are relocating because of your employment.
- Strict Appraisal Guidelines: FHA has some appraisal guidelines that may make your FHA loan process more of a headache than you bargained for. For example, if the home has a crawl space that is shorter than 18 inches, a missing handrail, or chipping paint on a home built before 1978, than those items will need to be fixed before the home is eligible for FHA financing.
All of these advantages and disadvantages are all relative to the other loan programs that you are comparing them to. If you qualify for USDA, VA, FHA, and Conventional financing you will want to look at the advantages and disadvantages of each program and compare them to each other.