FHA loans are a tempting solution for homebuyers who don’t have enough money saved for a significant down payment. Backed by the Federal Housing Administration, these mortgages allow buyers to purchase a home with as little as 3.5% down and do not require many of the restrictions required by other purchasing programs. While the low down payment can be tempting, it is important to weigh both the pros and cons of FHA loans before deciding whether one is right for you.
Advantages of FHA loans
FHA loans have been popular since they were first offered during the Great Depression in the 1930s because they make homeownership more accessible. The low down payment requirement means that even those with little money saved can still purchase a home with a manageable monthly payment. In addition, FHA loans are often available to borrowers with low credit scores which would prevent them from qualifying for other types of loans. Even those with a high debt-to-income ration can qualify for an FHA loan, so they can truly be a godsend for those who are shut out from other traditional mortgages due to bad credit or high amounts of debt.
Disadvantages of FHA loans
While many homeowners are tempted by FHA loans because of the low down payment requirement, these loans tend to be quite expensive in the long run. This is because underlying insurance fees can add a significant amount to the overall cost of your mortgage. Currently, that fee is set at 1.75% at closing as well as a .85% monthly fee for mortgages with terms of more than 15 years when the loan-to-value ratio is more than 95.01%. If the LTV is lower than 95% then the fee is reduced to .8%. Over the life of your loan, this will add a significant cost to your mortgage.
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