FHA.. or bust? A quick overview of pros and cons..

[Graham Nadler]

I see a lot of discussion on utilizing FHA mortgage loans for a first "house hack" owner occupied property (1-4 units).

There are certainly benefits of an FHA mortgage. They can be more relaxed on negative credit circumstances, mortgage insurance can be cheaper when compared with conventional products, your interest rate can sometimes be better, and there is the fabled 3.5% minimum down payment.

However there are certainly sides of FHA that aren't always quite as favorable to the borrower. I find that people don't always know about these details of an FHA loan. FHA Mortgage insurance cannot be cancelled once you reach 20% equity in your property like it is with conventional private mortgage insurance (PMI). That means you have mortgage insurance for the life of the loan (often 30 years of an extra cost with your monthly payment) unless you sell or refinance. The appraisals are harder to pass without additional repairs (E.g. can't have peeling paint) when compared to conventional. There is also an additional 1.75 points (1.75% of the purchase price) financed into the loan that is an extra cost for a mortgage insurance premium. So they are generally more expensive than conventional products.

I am not saying I don't think FHA loans can be good. They can be a good fit depending on someone's situation. It can be an awesome way of getting into a 1-4 unit property with very little down. What I am saying is when shopping for a loan for an owner occupied property there are often other options available to you besides FHA. Options that could potentially be better depending on your situation and goals. I would encourage you to talk with a couple different lenders in your area to see what is available to you wherever your market is. In my local market there are numerous 3% down conventional products for single family, 5% down conventional products for duplex, down payment assistance on more than 1 unit properties, tax credits, all kinds of programs that have other ways to benefit owner occupant buyers. Your low down payment options do dwindle once you go over 2 units with conventional products. My point is that wherever your market is, there are probably loan products that you may not have know existed as many can be tailored to the area you live in. Do your due diligence when picking a mortgage loan that is best for you as you have many more options available to you as an owner occupant shopper.

Let me know your thoughts!