What are the drawbacks of FHA loans?
Mortgage Insurance Fee (MIP)
Regardless of how much money the borrower puts down for the down payment, the Federal Housing Administration imposes MIP on all FHA mortgages. The FHA MIP is a mortgage loan insurance policy that protects the lender in the event of a borrower failure.
This is one of the main disadvantages of using the FHA program, as it raises monthly payments. The length of the annual MIP depends on the amortization term and LTV ratio at the loan origination date; however current rules compel FHA borrowers with less than a 10% down payment to pay MIP for the life of the loan.
Loan Amount Restriction
The Federal Housing Administration establishes maximum mortgage limitations for FHA loans, which vary by state and county. Current FHA loan restrictions differ by geography and home price. The maximum is $331,760 in low-cost areas and $765,600 in the most expensive counties. These restrictions often change yearly, so check the HUD website for the county’s most recent FHA loan limits. The external link opens in a new window.
What is the distinction between an FHA and a conventional loan?
A conventional mortgage loan originated in the private sector and is not government-insured. This means that, unlike federally insured loans, conventional loans do not provide any guarantees to the lender if the borrower defaults on the loan.
FHA loans also originated in the private sector, but the government insures them through the Federal Housing Administration. This insurance is intended to protect the lender rather than the borrower.
If the borrower defaults on loan and their home aren’t worth enough to repay the debt in full through a foreclosure sale, the FHA will compensate the lender for the loss.
The FHA’s security comes at the expense of the borrower. Regardless of the down payment, the buyer must pay a percentage of the upfront mortgage insurance premium at closing with an FHA loan.
If the down payment is less than 10%, the buyer must make monthly mortgage insurance payments for the duration of the FHA loan.
Another significant distinction between FHA and conventional loans is that FHA loans often have lower down-payment requirements and more flexible underwriting rules.
As a result, individuals with less-than-perfect credit and less cash on hand may be able to qualify for a mortgage or refinance with the help of an FHA loan. However, while the FHA may have less stringent qualifying conditions, individual banks and lenders will always establish their own FHA underwriting guidelines on top of those, which are known as lender overlays.
