FHA pros and cons

FHA loans are a good option, especially if you have low credit or a lot of debt. But they come with their own set of drawbacks too.

FHA pros

Some of the best reasons to apply for an FHA home loan include:

  • Lenient credit requirements: You can generally qualify for maximum FHA financing with a credit score of 500 to 580 versus a 620 to 640 score for a USDA loan. You might also be eligible with a credit score between 500 and 579 if you can make a 10% down payment.
  • Higher debt-to-income ratios: Your back-end DTI — that is, your total monthly debt obligations — can be as high as 56.9% for FHA loans, but only 45% for USDA loans.
  • Potentially lower interest rates: FHA interest rates can be lower than rates for USDA loans because you have the option to choose shorter repayment terms, including a 15-year fixed interest rate. The USDA only offers 30-year fixed loans, which naturally have higher rates.
  • Multi-family units can qualify: Properties with up to four units can qualify for financing with an FHA loan when one unit is your primary residence. For example, purchasing a duplex with an FHA loan is allowed as long as you live in one half of the property. Like USDA loans, however, second homes and investment properties are ineligible.

FHA cons

  • Higher down payment requirements: Depending on your credit score, you’ll need to make a 3.5% or 10% down payment. USDA loans require no down payment.
  • Higher mortgage insurance premiums: Your upfront and annual mortgage insurance premiums are higher than the USDA guarantee fee and annual fee.
  • Difficult to cancel mortgage insurance: You’ll pay an annual mortgage insurance premium for the life of the loan unless your down payment is at least 10% — in which case, you’ll only pay mortgage insurance for the first 11 years.
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Louisville Kentucky Mortgage Lender for FHA, VA, KHC, USDA and Rural Housing Kentucky Mortgages: What is the difference between Conventional, FHA and VA Mortgage loans in Kentucky?

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Published by Kentucky Mortgage Broker Offering FHA, VA, USDA, Conventional, and KHC Down Payment Assistance Home Loans

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