First-time home buyers face a lot of decisions. One of the most important is the type of home loan you choose. The type of mortgage you choose has an effect not only on your monthly payment but on how much money you’ll need to front when it’s time to close on your home.
There are a few low-down payment options, such as conventional and the USDA Rural Development, but some of them require that you are a low -to moderate-income borrower, or you have almost perfect credit. If you are not a low- to moderate-income borrower, or have had some credit challenges, then an FHA loan might be a good option for you.
The FHA loan program has enabled many first-time buyers to become homeowners. Let’s take a look at the advantages of this type of loan as well as a few drawbacks so you can make an informed decision on the right loan for you.
Benefits of an FHA Loan
Let’s dig into the top five benefits an FHA loan offers a first-time home buyer.
1. Low Down Payment Requirements
A lower down payment requirement is the biggest advantage an FHA loan has over a conventional mortgage. FHA loans require as little as 3.5 percent down, making them a popular choice for buyers who haven’t had time to save up a large amount of cash.
2. Flexible Credit Requirements
Generally, FHA loans are more forgiving of lower credit than conventional mortgage loans are. Buyers with scores as low as 580 may qualify for an FHA loan.
3. Competitive Interest Rates
FHA loans offer competitive interest rates compared to conventional loans. This rate is fixed for the life of the loan, which means it will not increase (or decrease) in the future.
4. Gift Funds Allowed
FHA home loans allow you to use gift money from family, friends, or a down payment assistance program to help you pay for your down payment. This makes it possible for many first-time borrowers to purchase a home.
5. Assumable Loan
If you sell your home in the future, the buyer of your home may be able to assume your FHA loan. This may be a selling point if interest rates have increased since you bought the home.
Drawbacks of FHA Loans
At Lake Region Bank, we want to help you make the most informed choice possible when you’re applying for a home loan. Here are a few of the drawbacks of an FHA loan.
1. FHA Mortgage Insurance Premium and Upfront Mortgage Insurance
FHA loans require you to pay a mortgage insurance premium (MIP) over the life of your loan. This can increase your monthly mortgage payment and can only be removed by refinancing your loan. They also require you to pay an upfront mortgage insurance premium. This gets added on top of your loan. It provides your mortgage lender with some protection in the event that you default on your loan.
2. Property Standards
FHA appraisals are more stringent than those required for conventional loans. Your new home must meet minimum property standards to be eligible for FHA financing. You may need to negotiate with your seller to make improvements, especially if you’re buying an older home.
3. Loan Limits
Generally, you can’t use an FHA loan to purchase the most expensive home in the area. FHA loans have home price limits based on your county. In high-cost areas, this may affect your purchasing power. In Kandiyohi County in 2025, the FHA loan home price limit was $524,225.
4. Less Competitive in Hot Markets
Because of the strict appraisal requirements and potential for longer closing times, an FHA loan may make your offer less competitive to sellers compared to buyers with conventional loans. This typically occurs in competitive real estate markets where sellers are reviewing multiple offers at once.
Is an FHA Loan the Right Choice for You?
Despite these drawbacks, and FHA loan can be a great choice for first-time buyers. If you have limited savings for a down payment, lower credit score, or want more flexible eligibility criteria, an FHA loan may be the right choice for you.
However, if you have a higher credit score and can afford a higher down payment, a conventional loan may save you money in the long-run, as you can avoid the long-term MIP.
At Lake Region Bank, we can explain the benefits and drawbacks of FHA and other loan programs so you can make the right financial decision for you and your situation. Our friendly, local team can help you compare your options to help you find the best fit. Get in touch with us today to get the process started.
