FHA loans make it possible to put down as little as 3.5% upfront and still get competitive rates. Down payments make up the majority of cash to close in any purchase loan, and saving up for one can be a significant barrier for some borrowers. Here’s a breakdown of the key pros and cons when it comes to FHA loans: Pros They can be a great fit for some borrowers, particularly first time homebuyers who often need lower down payment options, but you should weigh the costs and benefits of any mortgage before committing. FHA loans pros and consįHA loans are meant to make homeownership more accessible to people with fewer savings set aside and lower credit scores. While low down payment minimums and competitive interest rates are still possible with a conventional loan, you’ll need to show a strong credit score to qualify for those advantages.Įach loan type has advantages and disadvantages-including different mortgage insurance requirements, loan limits, and property appraisal guidelines-so choosing the one that works best for you really depends on your financial profile and your homebuying priorities.
Generally speaking, FHA loans might be a good fit if you have less money set aside to fund your down payment and/or you have a below-average credit score. Because private lenders assume all the risk in funding conventional loans, the requirements to qualify for these loans are more strict. A conventional loan is any mortgage that is not insured by a federal entity. Home loans fall into two broad categories: government and conventional. What’s the difference between FHA and conventional loans? Lenders are then able to loosen their qualifying guidelines, making mortgages available to middle and low income borrowers who might not otherwise be approved under conventional standards. Today, government-backed mortgages still offer a safety net to lenders-because a federal entity (in this case, the FHA) is guaranteeing the loans, there’s less financial risk if a borrower defaults on their payments. Approved lenders began funding FHA loans, which offered more reasonable down payment and credit score standards. The government stepped in and began backing mortgages with more accessible terms. It was created just after the Great Depression, at a time when homeownership was prohibitively expensive and difficult to achieve because so many Americans lacked the savings and credit history to qualify for a loan. Get Pre-Approved What does FHA stand for?įHA stands for Federal Housing Administration, and the FHA is a government agency that insures mortgages.
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