What Home Buyers Should Know About FHA Financing
FHA financing has become a preferred route for many home buyers for several good reasons. It has unique challenges as well, though, and home buyers need to be aware of both the advantages and disadvantages when choosing to use this route for their home financing. Let’s review the pros and cons of FHA financing here so you can better understand your options when selecting this route for your home purchase.
Advantages of FHA Financing
- Less Money Needed Upfront – FHA financing currently requires a 3.5% down payment while conventional financing typically requires a minimum of 5% down. FHA financing also does not currently require that a buyer have any additional savings left after purchase while conventional financing typically requires the buyer to have two months of mortgage payments minimum set aside in the bank after closing as a safety precaution. Because of these lighter requirements, the FHA buyer can typically buy a home with less money needed upfront.
- More Flexibility on Credit History – FHA financing normally has more flexibility with a credit history that is newer or slightly bruised. Conventional financing will typically require that a person’s credit history be well established with little allowance for credit bruises like late payments or collections. FHA has more liberal guidelines on this which can help the buyer whose credit is newer or has experienced some challenges.
- Ability to Purchase A More Expensive Home – assuming you stay under FHAs maximum loan amount, FHA financing will normally allow a higher ratio of bills to income than conventional financing will for the buyer with average to strong credit. This can help a FHA buyer be approved for a larger loan amount than the conventional homebuyer in many situations.
Disadvantages of FHA Financing
- More Paperwork – Due to the addition of the Federal Housing Administrations guarantee of FHA loans, there is additional paperwork needed both to approve and close the FHA mortgage. This is typically just a minor inconvenience, but it’s still something that the home buyer should be aware of upfront.
- Higher Property Standards – the Federal Housing Administration places a high importance on the safety and soundness of the properties it finances. Because of this, they hold these properties to a higher standard than conventional financing typically requires. Prior to making an offer on a home with FHA financing, the home buyer should talk with their lender about the property to determine if there are any features of the home that might make it ineligible for FHA financing it its current condition.
- Higher Mortgage Costs – FHA currently charges a 1.75% upfront mortgage insurance premium to the home buyer. This cost can be financed into the loan or paid at the closing, offering some flexibility to the buyer, but either way it is a cost that will need to be paid at some point. Additionally, FHA financing currently has higher monthly mortgage insurance costs than conventional financing in most situations. Both the upfront and monthly cost change periodically so the homebuyer should check with their lender to see what these charges are when they find their home and how they compared to the mortgage insurance cost for a conventional loan.
While there are other minor nuances of both FHA and conventional financing that differentiate the two, these pieces are the primary ones that the homebuyer should considering when determining what type of financing is best for them. For the buyer with strong credit, savings for the down payment and decent room between their bills and income, conventional financing is typically easier and less expensive. For the buyer with newer or bruised credit, limited savings or tighter bills compared to income, though, FHA is a strong option to consider.