What is an FHA Loan?

what is an FHA loan?

When you want to buy your first home, the financing options and approvals can be intimidating. One of the common options is an FHA loan. The Federal Housing Administration (FHA) loan was made to help lower credit score individuals. In turn, it helps lower-income individuals in the case where the twenty percent down payment isn’t possible. In this article, we’ll discuss the advantages and disadvantages of the FHA loan.  We’ll help to inform you and help you pick if it’s right for you. Real-life examples will be shown at the end.


The FHA Loan

An FHA loan is a mortgage backed by the Federal Housing Administration. The administration is a part of the Housing and Urban Development (HUD) branch. This loan type offsets the risk for lenders. It enables them to offer loans to individuals who might not meet the traditional requirements of mainstream mortgages. This makes FHA loans a popular choice with first-time home buyers with low credit.


The Pros of FHA Loans

    1. Low Down Payment: One of the most desirable features of this loan is the low down payment required. Conventional loans require an average of twenty percent down, which is significant for many. FHA loans can require a minimum of 3.5% down. This allows many more prospective buyers to enter the market.
    2. Lenient Credit Requirements: FHA loans are more forgiving when it comes to credit scores. Borrowers with credit scores as low as 580 may qualify for an FHA loan. The FHA is an attractive option for those actively working to raise their credit.
    3. Flexible Income Qualification: Like many others types, FHA loans use the borrower’s debt-to-income ratio. This allows for a more comprehensive outlook on the borrower’s finances for repaying the loan.
    4. Assumable Loans: FHA loans are assumable. This means that your loan is transferrable if you want to sell your home. The new buyer would take over the existing FHA loan payments. This feature can be beneficial when interest rates are rising.
    5. Fixed and Adjustable Rates: FHA loans offer both fixed-rate and adjustable-rate options. This provides borrowers with more options to suit their financial preferences.


    The Cons of FHA Loans

      1. Mandatory Mortgage Insurance: FHA loans require upfront mortgage insurance premium (MIP) payments as well as annual MIP payments. This increases the overall cost of the loan and should be taken into consideration.
      2. Loan Limits: FHA loans have limits on the amount you can borrow. This varies based on your location. In high-cost areas, these limits might not be sufficient for purchasing certain properties.
      3. Property Requirements: FHA loans come with property standards that the home must meet. This means that certain properties, such as fixer-uppers, might not qualify for FHA financing.
      4. Lifetime Mortgage Insurance: Unlike conventional loans, FHA loans have lifetime MIP requirements for loan terms over 15 years. Requirements also include a loan-to-value ratio greater than 90%. This results in higher overall costs for the entirety of the loan.
      5. Potential Seller Resistance: Some sellers might be hesitant to accept offers from buyers with FHA loans due to perceived complications in the loan process.


      Real-Life Examples


      Example 1: Jane’s First Home

      Jane, a recent college graduate, always dreamt of owning her first home. With limited savings, she found it challenging to meet the down payment requirements of conventional loans. Luckily, she qualified for an FHA loan. This allowed her to purchase a condo with just a 3.5% down payment.


      Example 2: The Smith Family Upgrade

      The Smiths had been living in their small home for years. They wanted more space when their family started growing. After finding a more spacious home in a better neighborhood, they decided it was time. Since they had a good credit history, but didn’t have a substantial down payment saved up, they opted for an FHA loan.



      FHA loans are a valuable tool for those looking to purchase their first home. This is especially true in contrast to traditional financing options. As you consider your home financing options, weigh the pros and cons carefully. Choose the path that aligns with your financial goals and circumstances. Always consult a professional before making any key decisions. It’s best to have another set of eyes as well as a financial planner to map out your financial future.



      Learn how to apply for a home loan here!


      Have a question? Email Brenda