Pros and Cons of FHA Mortgage Loans

The Federal Housing Administration (FHA) insures mortgages so that low-income individuals can still qualify for home loans. Insurance from the FHA mitigates lender risk and lowers interest rates and initial cost for homebuyers. However, there are drawbacks to this program and it isn't for everyone.

What Section 203(b) Says About Mortgage Insurance

The FHA is not a mortgage lender, but a mortgage insurer. This program helps families buy homes by reducing costs. The program motivates lenders to grant mortgage loans to people who just barely fall short of the underwriting requirements. FHA loans are known for their small down payments as compared to traditional loans.

Under Section 203(b), the FHA helps people to purchase a new or previously-owned home with up to four units inside. The only catch is that the buyer has to personally occupy the home.

Advantages of Using the FHA Program

FHA mortgages make it possible for some homebuyers to qualify for a traditional loan with lower interest rates, rather than toxic sub-prime mortgages with high rates. Over the course of the loan, this saves thousands of dollars in interest.

The requisite down payment is also smaller. Typically lenders ask for 10% down, but the FHA makes it possible to get in a home with as little as a 3% down payment. Closing costs can also be absorbed into the mortgage, making the purchase price of a home more affordable.

The FHA also puts a ceiling on the fees that are tacked on to home mortgage loans. For instance, the loan origination fee must be less than 1% of the total loan amount.

Disadvantages of FHA Loans

Of course, FHA loans include drawbacks and aren't for everybody. The FHA sets loan limits in order to continue to serve low- to moderate-income families. When you consider these loan cap amounts, you might end up having to apply for a conventional or jumbo loan to buy the house.

The home you buy must also become your primary address. FHAs are not intended for use by people buying second homes or investment properties.

Getting an FHA Insured Mortgage

A large variety of participating lenders - almost all of them - carry loans backed by the FHA. As always when shopping for a loan, look around, do research, and compare mortgages. Just because a lender has FHA approval doesn't mean they have the lowest rates.

Rates and terms are easy to locate online, either by surfing lender websites or visiting a mortgage broker's home site. Collecting quotes allows you to gather and research interest rates without harming your credit rating.