FHA Loan: Your Ticket To Homeownership? (Low Down Payment)

FHA Loan: Your Ticket To Homeownership? (Low Down Payment)

So, you say you want to buy a home but you can only afford a small down payment? If you have good credit (not necessarily perfect), an FHA mortgage could be your ticket to home ownership. An FHA mortgage is a mortgage that’s been guaranteed (i.e., insured) by the Federal Housing Administration. The actual loan is made by a bank or other traditional mortgage lender, but FHA underwriting means the lender won’t be left on the hook if the borrower defaults. It’s easy to see, then, why FHA loans are popular with lenders – there’s a lot less risk. But why are they popular with homeowners?

  • As noted, the primary advantage of an FHA loan is that you don’t have to have a large down payment to buy a home. With FHA backing, lenders are willing to assume a larger mortgaged amount, meaning you might only need a down payment of as little as about 3.5%.
  • Some FHA loans are assumable, which means that down the road, a buyer might be able to take over the mortgage without having to qualify for another loan product – and that can offer a real advantage when you decide to sell your home.
  • FHA 203K loans allow buyers to take out a single loan to fund both the purchase of the house and home improvement, a very convenient and attractive option to many borrowers who don’t want the hassle of applying for additional loans to fix up the house they’re buying.

Those are some pretty attractive advantages, especially to first-time buyers or those with lower incomes. But like any loan product, FHA loans aren’t without disadvantages, and there are a few of the main ones:

  • FHA loans usually are not available for very expensive properties and the amount you’re able to borrow will depend on whether the FHA considers the area to be a “high cost” or “low cost” neighborhood. Other loan products are usually more flexible in the amounts you can borrow.
  • You’ll need to pay a mortgage insurance premium at closing (currently 1%) and an additional mortgage insurance fee with the first 60 monthly payments (right now, 0.85%-0.90% annually); these fees help mitigate potential losses the FHA might face when borrowers default.
  • Interest rates may be higher than standard loans, especially for buyers with top-notch credit.

Like any other loan product, you need to do your homework: While an FHA mortgage might be the ideal solution for some homebuyers, if you have good credit and a decent down payment, you might do better to look for other loan products which may offer lower interest rates or may not require mortgage insurance.