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FHA Loans: Benefits and Drawbacks

FHA Loans: Benefits and Drawbacks

If you’re thinking of purchasing a home, there are many loan options for you to choose from. In addition to popular options such as fixed- or adjustable-rate mortgages, FHA home loans can also be viable choices. FHA loans refer to mortgage loans backed by the U.S. Federal Housing Administration and provided by FHA-approved lenders. To learn about some of the benefits and drawbacks of FHA loans and to decide if they’re the right financing option for you, continue reading.

Benefits of FHA Loans

  • Lower down payments: One of the biggest benefits of FHA loans is that they require lower down payments than more conventional home loan options. Conventional lenders generally require down payments of around 5 to 15 percent of the home’s value. FHA loans, on the other hand, only require down payments of 3.5 percent.
  • More lenient credit qualifications: In addition to requiring lower down payments than traditional loans, FHA loans also require lower credit scores. Conventional lenders typically require a credit score of 620 or more to qualify for a home loan, FHA loans only require a credit score of 580 or higher in order to get approved. 

Drawbacks of FHA loans

  • Higher mortgage insurance costs: In exchange for a lower down payment requirement, FHA lenders require borrowers to pay for private mortgage insurance. This lowers the lender’s risk in case the borrower defaults on the loan. In addition to monthly mortgage insurance payments, people who take out an FHA loan will also have to pay an upfront mortgage insurance fee. Regardless of the down payment, the private mortgage insurance and upfront mortgage insurance premium will account for 1.75 percent of the loan.
  • Potentially higher interest rates: All interest rates for FHA loans are the same, regardless of the borrower’s credit score. If you have an extremely low credit score, the interest rate of an FHA loan may be lower than what other conventional lenders are offering. However, if your credit score is decent, good, or even great, you won’t be rewarded with a lower interest rate for your FHA loan. In such a case, you may be better off opting for a conventional loan that will give you more competitive rates.