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In our previous article, we covered some of the great advantages of the FHA home loan program backed by the United States Federal Housing Administration (FHA). These loans give more American home buyers the opportunity to qualify for a home loan or home refinance loan when they may not be eligible for conventional mortgages or other special mortgage financing programs.
Disadvantages of FHA Home Loans
However, it is important to know there are a few drawbacks that come with FHA home loans. There are several disadvantages to FHA home loans. The good news is that they are really more just trade-offs.
Remember that lenders/banks and the FHA are taking more risk by offering these loans to less-qualified home buyers. Therefore, certain restrictions and requirements are enforced to protect them (and the buyer) from a bad outcome such as falling behind on monthly mortgage payments or perhaps even foreclosure.
Some may view these as disadvantages, but it’s all about your perspective as a home buyer. These trade-offs may be well worth it if an FHA home loan is the best (and only, in some cases) solution that enables you to purchase a home in the Atlanta area. After all, homeownership comes with its own financial benefits like tax incentives and long-term property appreciation (home equity).
Higher Loan Costs
FHA home loans can come with more upfront closing costs and fees attached to each mortgage payment. Again, this is the lender protecting against loan default concerns with a less-qualified borrower. You may be paying a little more to get an FHA home loan. However, it may be the only way you can get a mortgage loan and buy a house. This trade-off may be well worth it for the long-term financial benefits of homeownership like property value appreciation and excellent tax deductions.
If you have strong finances and/or can afford a higher down payment, then you may want to consider a conventional loan as that may reduce some of your costs and net you a lower mortgage rate. Some conventional loans may even be able to finance with a down payment as low as 3% if the borrower is in a very strong financial position otherwise.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) or a mortgage insurance premium (MIP) will be attached to your FHA mortgage loan if you have a down payment of less than 20% of the total loan value. This is another important trade-off to understand. You will have a PMI premium tacked on to your monthly mortgage payments.
This is simply an extra insurance fee that is there to protect the lender in case you default on your home loan. You will not get the payments back and they are not credited toward anything else. It is a minimal fee that is based on your total loan amount, so again it may be a trade-off that is well worth making if the FHA home loan allows you to buy your first home in Atlanta.
PMI will typically be required at least until 20% of the loan principal amount is paid off. In some cases, PMI can last the entire length of the loan. Be sure to ask your mortgage lender or mortgage broker about PMI and other fees that will affect your monthly payment amounts.
Loan Limits
FHA home loans do have loan limits based on the area where you are buying property. In most counties that make up the Atlanta Metro area, the FHA loan limit for 2022 will be $471,500 for single-family homes. That limit will be higher for multi-family properties. It will be lower in some of Georgia’s more rural counties (counties in which a USDA loan may be available and offers even more advantages than an FHA loan). For Atlanta home buyers, this means the most you will be able to borrow with an FHA loan is $471,500. This amount will likely go up some in 2023 if you are already looking ahead to buying next year.
Property Usage
The FHA also stipulates that the property you are purchasing with an FHA loan is to be used as your primary residence. This includes multi-family properties where you will have to occupy one of the units, even if you are renting out the rest for income gains. There are some FHA loan options available to investment property buyers, but that’s a more complicated concept.
Talk with your mortgage lender about that if you think an FHA home loan may be your best investment financing solution. In general, FHA loans are meant for regular home buyers looking to use the property as their primary residence.
FHA loans are great for some home buyers, but they are not for everyone. This is why it is important to consult with a trustworthy mortgage lender or mortgage broker who is certified to offer different loan programs, including FHA, VA, USDA, jumbo and conventional home loans. This is exactly what we do at Moreira Team | MortgageRight.
Contact us today if you are ready to buy a home or have mortgage questions. We can see if an FHA loan is right for you or find a better solution if it is not. We can also help you get pre-approved before you start your home search, which is highly recommended. Get started by getting a custom FHA rate and closing cost quote. It takes less than 30 seconds and you will be able to choose between a variety of different scenarios. Get started now, it’s FREE!