4 Common Disadvantages of FHA Loans

FHA loans are very popular with first time home buyers and borrowers with lower credit scores. While the loans have a place in the market and provide a great benefit, they also have drawbacks that make them unattractive to certain borrowers. Some people simply will not benefit from an FHA loan when compared to other loans in the marketplace. Here are a few common disadvantages of FHA loans.

1. Loan Limits

One of the biggest drawbacks with FHA loans is the loan amount limitations. The limit is unique for each region. However, if you are in an area that has expensive real estate and the limit is low, you may not be able to get the money that you need. This can be a major problem when you can't qualify for other mortgage types. You may not be able to buy the house that you want. Most other mortgage programs do not have these loan limits; they are capped at higher loan limits.

2. Mortgage Insurance

Although you do not pay private mortgage insurance with FHA loans, you do have to pay a form of insurance on the loan. In fact, it is often more expensive than the PMI would be with a regular loan. With FHA loans, you have to pay a large upfront fee for mortgage insurance at the beginning of the loan. This is usually added in with the closing costs and can be as much as 2.25% of the total. Then, on top of the upfront fee that you have to pay, you will also be responsible for a monthly payment of mortgage insurance. This is a smaller amount than the upfront fee, but it adds up over time and makes your monthly mortgage cost higher. You'll also usually have to pay this mortgage insurance premium for the life of the loan.

3. Limited Options

Although FHA loans present an option for many borrowers that would otherwise not be able to buy a home, they have limited loan options:

  • They do not have the wide array of options that a typical mortgage lender will have
  • You will not find the fixed-period adjustable rate mortgages and interest-only products that many other lenders offer

These loans are only designed for those that plan on being in their houses for the duration of the loan. Therefore, any advantages that can be gained from an adjustable rate mortgage are not present with FHA loans.

4. Credit Required

Even if you don't have excellent credit, you will usually be required to have an acceptable payment history. The most recent two years is heavily weighed and although the guidelines are more flexible, it must make sense. For example, if you went into debt with collections and judgments one year ago, it should be for a fixed period of time and with good reason. Some common acceptable reasons are medical injuries, death or divorce. The FHA lender will require that you provide supporting documentation for the extenuating circumstance involved.

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