FHA is an acronym for the Federal Housing Administration. An FHA loan simply means that the Federal Housing Administration is insuring the loan, which is provided by your choice of lender.
Here are the pros and cons of going to market with this loan:
Pros
FHA backed loans require a minimum down payment of 3.5%. Buyers are attracted to the FHA loan because it allows them to keep more of their money. Buyers can then use any additional funds for remodeling, updates, or closing costs. Always discuss closing costs with your lender to understand how much you will need to pay out of pocket. Lenders may not be able to give you an exact amount but they will be able to provide a ballpark estimate.
Buyers need a minimum credit score of 580 to qualify for a FHA loan. The conventional loan minimum credit score is 620.
Cons
FHA loans are considered high risk for mortgage lenders. If the FHA wasn’t insuring them, mortgage lenders would not be providing them. On your mortgage statement you will see a line labeled PMI (Private Mortgage Insurance). In addition to your monthly mortgage principal, interest, and tax payment, you will also be required to pay a PMI fee. You will continue to pay PMI until you have reached the 80/20 loan to value ratio. The terms surrounding PMI's are evolving and vary from lender to lender. Be sure to inquire with your lender about the terms surrounding a PMI.
A Seller can choose to reject a buyers contract that is is being financed by an FHA loan, or even not entertain the offer at all. FHA loans require a home to be move-in ready. If a sellers home does not meet the satisfactory conditions of a FHA appraisal and inspection, the seller (or buyer) will be required to make the requested improvements before finalizing the sale. MLS listings will state whether or not FHA loans are accepted.
FHA loans require 45 days to close escrow. Conventional loans generally require 30 days to close escrow.
I often advise clients that if they are thinking of obtaining an FHA loan that they provide a higher down payment than the 3.5% required by the lender, especially in a sellers market. Remember, this is the minimum percentage that the lender needs from you, not the seller.
