FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

As with other loan types, there are pros and cons to entering an FHA backed mortgage agreement:

PROS:

  • Unlike most conventional loans, FHA doesn’t require a large down payment. You can put down as little as 3.5 percent of the purchase price of the property.
  • FHA loans are a good option for young, first-time home buyers who have not had as much time to save for a large down payment or establish a high credit score.
  • Even if you’ve suffered from bankruptcy or foreclosures that have hindered your ability to qualify for traditional loans, you may still qualify for a mortgage through the FHA.


CONS:

  • Paying the FHA funding fee, which includes a monthly insurance premium as well as an upfront premium, adds on to the cost of the mortgage.
  • You may end up with higher interest rates to compensate for the small down payment than you would with a conventional loan.
  • Whereas conventional loans allow you to cancel your insurance policy once you’ve accrued enough equity on the home, FHA loans require that you continue paying monthly mortgage insurance premiums.

FHA loans were designed to help stimulate the housing industry and enable more lenders to operate with less financial risk.

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