People looking out for mortgage loan will surely come across with the term FHA loan. According to many, this term may be better particularly when you are going to buy your first home. However, not all people understand the true meaning of this type of loan.
Basically, the term FHA or Federal Housing Administration offers mortgage insurance on loans made by lenders approved by the FHA within the United States, including its territories. So, it will not lend you the financial support, rather it insures your loan to minimize the financial risk of the lender.
In 1934, the U.S. Congress created the FHA and is now the largest insurer all over the world, having insured more than 34 million properties. But does it really protect the lenders against losses if in case the homeowner fails to pay the mortgage loan? Here are a few pros and cons of FHA loan.
List of Pros of FHA Loan
1. Low Down Payment
It doesn’t need a very huge down payment to secure a loan insured by the FHA. It only requires as low as 3.5% of the selling price. On the contrary, most loans will require 20% initial payment for the property cost. If that is the case, many low-income individuals can’t afford a 20% down payment.
2. Ideal for People Who Haven’t Saved Enough for a Purchase
Due to the fact that it only requires minimum cash investment, FHA-insured loans are ideal for those who haven’t been able to save enough for their purchase. So, those who have been denied many times over for conventional loans should benefit from this. Moreover, even if you have applied but have been denied due to foreclosure or bankruptcy, it is still possible to get an FHA loan.
3. Allows Greater Flexibility for Calculating Household Income and Payment Ratios
The popularity of FHA loan has allowed the ease of calculating the household income and the payment ratios. To be able to become eligible for FHA loans, it is important to have valid social security number, a resident of the United States, and at the right age to get a mortgage.
List of Cons of FHA Loan
1. Will Eventually Cost More Interest
The fact that it only costs as low as 3.5% in down payment, you will simply end up spending more on interest payment compared with having conventional down payment of 20%. If you want to save more money in the long run, you should opt for the conventional mortgage if you can afford the 20% down payment.
2. Annual Insurance Premium Can’t Be Canceled
Choosing the FHA loan will charge an upfront 1.75% in insurance rate. In this case, you shouldn’t be able to cancel the yearly mortgage insurance premium. On the other hand, if you choose conventional loans, you will be able to cancel the insurance policy if ever you substantial equity.
FHA loans can only be favorable if you can’t afford giving out a huge down payment, particularly those who can’t put up the necessary amount. But, if you can afford paying for the big down payment, you should opt for the conventional loan to eventually save a lot of money.
Brandon Miller has a B.A. from the University of Texas at Austin. He is a seasoned writer who has written over one hundred articles, which have been read by over 500,000 people. If you have any comments or concerns about this blog post, then please contact the Green Garage team here.