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FHA Loan Pros and Cons

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Photo by Tierra Mallorca on Unsplash
Josh Rapaport
January 27, 2023

Researching and learning what different providers offer is a great way to get started. So, what’s in this article? Here, you’ll learn about District Lending and FHA loan pros and cons; what is the federal housing administration? And whether this loan is good for you.

The Pros and Cons of FHA Loans: What You Need to Know

What is an FHA loan?

It’s a loan backed and insured by the Federal Government and designed to assist individuals in less-than-perfect financial situations to afford a home. The mortgage is helpful to first-time home buyers who haven’t had time to pay down their debts or save for a down payment.

When you’re looking to buy a home, you’re required to choose between two mortgage types:

  1. Conventional Mortgage: It’s a little harder to get as it doesn’t have any government backing and requires a minimum credit score of 620. Borrowers need to have a debt-to-income ratio of 36% and pay a minimum down payment of 3%.
  2. Government-Backed Mortgage: It’s a mortgage guaranteed by the Federal Housing Administration. The agency backs it, but a regular mortgage lender provides it. It only requires a credit score rating of 580 and a 3.5% down payment.

What is the Federal Housing Administration?

The Federal Housing Administration is a Federal Agency that the U.S. government established in 1934. Its mandate is to assist in boosting the current housing market. The agency integrated into the Department of Housing and Urban Development in 1965.

First-time home buyers who get approved for FHA loans pay mortgage insurance premiums that fund this agency’s operations. Its flexible lending options mean thousands of home buyers who can’t qualify for conventional loans can afford to buy one.

So, who qualifies for an FHA loan?

For you to qualify for this loan, you’ll need to meet the following requirements:

  1. Credit Score and Down Payment: Your credit score will determine your down payment. If it’s 580 or greater, you’ll pay a 3.5% down payment. But if it’s between 500 and 579, you’ll need to pay a 10% down payment.
  2. Property Standards: Borrowers can use it to buy a home having normal wear and tear but not one having significant safety or structural issues. For example, the house shouldn’t be close to a hazardous waste disposal area or have a worn roof.
  3. Debt-to-Income Ratio: Your debt-to-income ratio must be lower than 43% to qualify for an FHA loan. The DTI refers to the amount that goes towards servicing your debt. It’s achieved by dividing your obligations by your gross monthly income.
  4. Borrowing Limit: The agency restricts how much you can borrow. Your limit will depend on the type of property you want to buy and where you live. For example, borrowers in Orland will have a different limit for a two-family home than those in Los Angeles.
  5. Property Type: Once approved, you can use the FHA loan to buy a multifamily or single-family home. Other options include buying manufactured homes or condos. For a multifamily dwelling, the maximum number of eligible families is four.

Now that you know the requirements for getting an FHA loan, are you ready to take your next step? Read on to learn the FHA loan pros and cons to simplify your decision-making process.

What Are the Advantages of An FHA Loan?

FHA loans are best known for their flexible approval guidelines. Below is a look at the top pros of FHA loans:

1. Low Down Payments

Its top benefit is allowing homebuyers to put a down payment of as low as 3.5%. It makes it attractive to first-time home buyers and homeowners looking to refinance. Young buyers like it because many haven’t had a chance to save enough money for a down payment.

2. Flexible Lending Requirements

You cannot discuss the FHA loan benefits without mentioning its flexible lending requirements. All individuals are eligible to apply, though their loans will attract different down payment rates depending on their credit scores.

3. No Private Mortgage Insurance Required

Traditional mortgages require an applicant to obtain private mortgage insurance if they have a down payment of less than 20%. The policy usually costs between 0.2% to 2% of your mortgage, which can significantly raise your monthly expenses.

Luckily, you don’t need a PMI when applying for an FHA loan.

4. It Accepts a Higher Debt to Income Ratio

Lenders use your DTI to measure your ability to make monthly payments for your mortgage. FHA loans are more beneficial than conventional mortgages as they tend to offer more leniency. Its accepted limit is a DTI as high as 43%.

5. Better Interest Rates

The interest rates charged on a mortgage are dynamic and are typically affected by the prevailing state of the economy. However, you shouldn’t take this to mean that there’s nothing you can do to lower them.

FHA loans are known to offer friendlier rates than other types of loans. It also provides adjustable-rate loans. The prevailing market interest rate will determine your rate, among other factors like your credit score, repayment term, and amount borrowed.

6. Gift Funds Permitted

Though FHA has set a 3.5% minimum down payment, young and first-time borrowers still find it challenging to raise these funds. Fortunately, FHA allows such buyers to receive gift funds to help them raise the down payment.

7. No Maximum Income Limit

Traditional mortgages have low down payment requirements, but you may fail to qualify for a loan if your income is considered too high for that median area. On the other hand, the FHA doesn’t have any maximum income limits.

Borrowers can qualify even if they are high-income borrowers.

8. It Has Less of a Wait time After Foreclosure or Bankruptcy

A bankruptcy will remain on your credit report for seven to ten years. The good news is that with the FHA, you can qualify for a loan after 12 months of getting a Chapter 13 discharge and two years after a Chapter 7 bankruptcy.

What Are the Disadvantages of An FHA Loan?

As seen above, the FHA loan benefits are many and diverse. But before you rush out to the nearest lender to submit your application, you also need to learn the cons of an FHA loan. The following are some of its drawbacks:

1. FHA Mortgage Insurance Premiums (MIPS)

One significant FHA loan downside you need to be aware of is the FHA mortgage insurance. You’ll first need to pay the upfront MIP of 1.75%, which is due when closing, then begin paying the monthly MIP added to your mortgage payments.

2. Property Requirements

As you research the cons of an FHA loan, you’ll soon realize that there are certain requirements that you must meet to get approved for this loan. For example:

  1. You cannot use the FHA loan to buy an investment property. It’s only for buying your primary residence.
  2. The FHA will need to appraise the property before you buy it. As such, the agency may prohibit the sale if it’s found not to be structurally sound or safe according to their standards.
  3. A first-time buyer searching for a fixer-upper may fail to get approved if the home fails to meet certain FHA standards.

3. FHA Has Loan Maximums

Though its approval guidelines are flexible, this loan may fail to work for your home purchase if you’re looking to borrow a large amount. For example, for 2022, the FHA has set a limit of $970,800 for a single-family home loan in high-cost areas.

Other homebuyers are eligible for a maximum of $420,680.

4. Sellers Often Misconstrue FHA Loans

Some sellers tend to misunderstand these loans, with most believing that they are inferior to other mortgages. Some sellers are preconditioned to think that buyers using these loans to purchase a home have poor credit, no money and that there may be issues with the appraisal.

While this is not always the case, their existence can be a significant drawback of applying for an FHA loan. However, you can overcome this drawback by strategizing with your real estate agent on how to become competitive in the seller’s eyes.

5. Limited Loan Terms

Buyers looking for an interest-only loan or a short-term adjustable-rate mortgage won’t find this option in an FHA loan. With the FHA loan, you only have two options: a 15-year or 30-year fixed mortgage.

Is an FHA Loan Right for You?

If you have gone through these FHA loan benefits and disadvantages and believe this is the best loan, the next step is to look for an FHA-approved lender. District Lending can help you find the right loan for your home purchase.

Its 400+ advisors will guide you throughout the loan selection and application process.


What is an FHA loan?

It’s a mortgage that’s insured and backed by the Federal Housing Authority but issued by banks and other mortgage lenders. FHA loans have flexible approval guidelines and no maximum income limits.

What are the Pros of FHA Home Loans?

The benefits of FHA home loans are many and include flexible debt-to-income ratios, they allow gifts, and they allow low credit scores. These benefits make them an ideal financing option for first-time home buyers.

Buy a home and refinance at no cost.
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