What Are the Disadvantages of an FHA Loan?


Quick Answer

Some of the disadvantages of an FHA loan include a maximum loan limit, an upfront mortgage insurance fee, flat interest rates for all borrowers and limited loan program options. There are also limits to the type of residence an individual can buy with an FHA loan.

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Full Answer

The amount that an individual can borrow with an FHA loan can vary depending on the state of residence. While this may not be too much of a disadvantage to the average homeowner, it can become an obstacle to higher end homeowners looking to buy a more expensive home.

FHA loans come with an upfront mortgage insurance fee in addition to a monthly mortgage insurance premium. A majority of borrowers end up adding the fee to the overall loan amount, which means they have to pay interest on the fee in addition to paying the regular mortgage insurance premium.

Since FHA loans have flat interest rates for all borrowers, there's little to no reason for a borrower to make an attempt to improve his credit or get his debts under control before applying for an FHA loan. With limited loan program options, borrowers are unable to take an FHA loan out for investment real estate, the buying of land or for a second home.

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