Getting an FHA Loan: Pros and Cons

Couple laughs as they move into a new home.

When buying a home, it’s important to choose a mortgage that fits your finances and meets your long-term goals. For buyers with less money for a down payment and with lower credit scores, loans backed by the Federal Housing Administration offer an affordable alternative to conventional loans.

Is an FHA Loan Right for Me?

If you have a lower credit score or can’t afford a large down payment, then an FHA loan may be your best option. However, if you have good credit and can make a down payment of at least 10% of the purchase price, then an FHA loan may be more expensive for you than a conventional loan.

Pros and Cons of FHA Loans

Here are some of the pros and cons of an FHA loans:

FHA Loan Pros and Cons

Benefits of FHA loansDownsides of FHA loans
Lower down payment requirements.
— Lower minimum credit score.
— Multiple loan types.
— Available for nontraditional properties.
— Maximum loan limits.
— Upfront and annual mortgage insurance.
— Property must meet FHA requirements.
— Can be more difficult to compete with buyers who have conventional loans.

FHA Loans vs. Conventional Loans

Most mortgages are conventional loans. Generally speaking, conventional loans are less expensive than FHA loans, and they’re also more difficult to get.

Here’s a look at key differences between FHA and conventional loans:

FHA Loans vs. Conventional Loans

 FHA LoansConventional Loans
Minimum Credit Score500620
Minimum Down Payment— 3.5% for people with credit scores above 580.
— 10% for people with credit scores under 580.
3%, though mortgage lenders may require more.
Mortgage Insurance— 1.75% of the loan amount upfront.
— 0.45% to 1.05% of the loan amount annually.
Generally required only if the down payment is less than 20% of the purchase price.
Loan Term15 or 30 yearsEight to 30 years

FHA Loan Alternatives       

If an FHA loan isn’t right for you, there are other alternatives to a conventional mortgage:

  • VA loan. This type of loan is backed by the Department of Veterans Affairs, and is offered to eligible service members, veterans, and their surviving spouses.
  • USDA loan. This type of loan is backed by the Department of Agriculture, and is offered to low- to moderate-income borrowers buying homes in rural areas.
  • State and local programs. Loan programs also are offered by state and local governments, and by nonprofit organizations aimed at making homeownership more attainable for low- and moderate-income families.

FHA Loan FAQ

Here are answers to some frequently asked questions about FHA loans.

Why would a buyer want an FHA loan?

A buyer might choose an FHA loan if they have a lower credit score or don’t have much of a down payment saved up.

Do you pay more with an FHA loan?

FHA loans can cost more overall than conventional loans. However, they also can help people buy a home and start building home equity sooner.

Why are FHA loans less attractive to sellers?

In competitive markets, some buyers offer cash payments or are willing to pay more than the asking price. In these instances, sellers may see offers backed by an FHA loan as less reliable than offers backed by cash or a conventional loan.

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