The Cons Of An FHA Loan
The main drawbacks of an FHA loan are the mortgage insurance premiums, which can last for the life of the loan when you put down less than 10%, plus county loan limits, FHA property standards and primary-residence-only use. FHA can still be the right choice. These are the costs to weigh first.
Key Takeaways
- FHA charges 1.75% upfront plus an annual premium, roughly 0.50% to 0.75% of the loan per year on typical 30-year loans.
- With less than 10% down, the annual premium lasts for the life of the loan; at 10% or more it lasts 11 years.
- County limits, property standards and the primary-residence rule can rule out some homes.
- Many borrowers later refinance into a conventional loan to drop the insurance.
1. Two mortgage insurance premiums
You pay an upfront premium of 1.75% of the base loan and an annual premium billed monthly. The upfront premium can be financed, but financing it means you pay interest on it.
2. The insurance can last a long time
If your down payment is under 10%, the annual premium stays for the life of the loan. At 10% or more, it drops off after 11 years. A conventional loan’s private mortgage insurance, by contrast, can be requested off at 80% loan-to-original-value with good payment history, and ends automatically at 78% of the scheduled balance. See FHA mortgage insurance explained for exit options.
3. A refinance is how most people exit
To remove FHA insurance sooner, you usually refinance into a conventional loan once you have about 20% equity and qualify. That means new closing costs, often 2% to 5% of the loan, and you take whatever rate is available then. Run the break-even math before you plan on it. See refinancing your mortgage.
4. County loan limits
FHA limits vary by county. The 2026 one-unit range is $541,287 to $1,249,125. Orange County and other high-cost counties sit at or near the top, but many inland counties are lower. If your price is above the limit, you need a larger down payment or a different loan. Check the 2026 California FHA loan limits and the loan limit lookup.
5. Property standards
The FHA appraisal checks safety, soundness and security as well as value. Peeling paint on older homes, broken stair railings, a failing roof or missing safety features may have to be repaired before closing. In a competitive market, some sellers prefer offers with fewer repair risks. See FHA property requirements.
6. Primary residence only
You must live in the home. FHA does not finance second homes or pure investment properties. If you want a rental or vacation home, look at conventional loans or the jumbo loan options if the price is high.
7. Seller and offer perception
Some sellers see FHA as slower or riskier because of the appraisal and property standards. A strong preapproval, a clean file and a prepared agent usually offset that.
What can I do to reduce these drawbacks?
- Put down 10% or more if you can. That cuts the annual premium to 11 years and lowers the upfront premium.
- Raise your credit score before you buy. A higher score can make conventional financing cheaper and give you more choices.
- Ask for seller credits to cover closing costs, up to the 6% FHA allows.
- Plan your exit. Track your home value and loan balance so you know when a conventional refinance could remove the premium.
How do I decide?
Compare the full cost over the time you expect to keep the loan, not just the rate. Factors that favor FHA include a lower score and limited cash. Factors that favor conventional include a score in the 700s and 5% or more down. Details are in FHA vs. conventional: which costs less? Also read the benefits of an FHA loan and return to the FHA loans chapter.
At Lendia, we give you the honest answer
At Lendia, we tell you when conventional or VA costs less. Contact us to see all three side by side, or get a rate quote now. Rates and terms depend on your situation; approval requires qualification.
Frequently Asked Questions
Can I refinance out of FHA mortgage insurance?
Often yes, once you have enough equity (commonly 20%) and qualify for a conventional loan. We can run the numbers to see if it pays off.
Is FHA mortgage insurance tax deductible?
Tax rules change. Ask a tax professional about your situation.
Why does FHA insurance cost more with a small down payment?
A smaller down payment means more risk to the insurer, which is why FHA keeps the premium for the life of the loan when you put down less than 10%.
Can I buy an investment property with FHA?
No. FHA is for primary residences. You can buy a multi-unit and live in one unit.
Will an FHA appraisal fail an older home?
Not automatically. Older homes are common with FHA, but safety or condition issues often need repair first.
Does FHA cost more than conventional?
It depends on your credit score and down payment. Sometimes it costs less, sometimes more.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.