Pros and Cons of Using an FHA Loan in the Bay Area

FHA loans are a popular mortgage option among some Bay Area home buyers. Their biggest appeal is a relatively low down payment and flexible qualification criteria for borrowers. First-time buyers, in particular, find this program appealing.

In this article, we will examine some of the pros and (potential) cons of using an FHA loan to buy a home in the San Francisco Bay Area.

Benefits to Using an FHA Loan in the Bay Area

The main benefit of the FHA mortgage program comes down to two things. A relatively low down payment, and flexible requirements for borrowers.

A Low Down Payment

These loans allow for a smaller down payment than some other mortgage options. As of 2021, the standard down payment for an FHA loan in the Bay Area is 3.5% of the loan amount. That’s one of the lowest minimum investments of any mortgage program, aside from VA loans.

While FHA loans are not limited to first-time buyers, this group finds the low down payment option appealing. In many cases, Bay Area first-time buyers don’t have enough money saved for a larger down payment. After all, they don’t have any proceeds from the sale of a previous home. Some turn to the FHA loan program, in order to minimize their upfront costs.

In order to qualify for the 3.5% down-payment option, you will need a credit score of 580 or higher. Borrowers with credit scores below 580 must put down at least 10% of the loan amount.

Easier Approval

Generally speaking, it is easier to qualify for an FHA mortgage in the Bay Area than a conventional loan. This is a government-backed mortgage program, meaning the lender receives some degree of insurance protection. This insurance helps offset the risk of potential default, or failure to repay.

As a result of this protection, mortgage lenders can be more flexible when approving Bay Area home buyers for FHA loans. For instance, the credit score requirements might be more lenient for an FHA loan, and the debt-to-income ceiling can be higher.

Potential Downsides to This Mortgage Option

Clearly, there are some key advantages to using an FHA loan when buying a home in the Bay Area. Among other things, this program offers a relatively low down payment and flexible qualification criteria.

But there are some potential downsides as well. In a competitive real estate market like the Bay Area, using an FHA loan might work against you. Some (but not all) sellers view these loans in a more negative light, when compared to “regular” conventional mortgages.

Appraisal and Inspection Process

One area of concern for sellers is the FHA appraisal and inspection process. Technically speaking, the Federal Housing Administration does not require a home inspection when an FHA loan is being used. But they do require a property appraisal, and there is an inspection component built into this appraisal.

The appraiser will review the property to determine its current market value. But he or she will also inspect the property to make sure it meets all of the minimum property guidelines for the FHA program.

Conventional mortgage loans, on the other hand, do not require this kind of inspection. They usually require a standard appraisal to determine market value — but not a full property inspection. The home buyer might choose to have the property inspected, but they are not required to do so.

Getting back to the Bay Area real estate market. Our housing market can be highly competitive at times, especially when inventory levels fall short of demand. In such times, a home seller might be inclined to choose an offer with a conventional mortgage over an FHA loan. Whether that’s fair or not is the subject of another article entirely.

Not all Bay Area home sellers look down on FHA loans. Some will consider all viable offers, regardless of mortgage type (a wise strategy). But there is a small subset that might prefer conventional mortgages over government-backed loans. As a home buyer, you should be aware that this kind of perception exists.

Mortgage Insurance

Mortgage insurance is another downside to using an FHA loan in the Bay Area. Borrowers who use this program have to pay both an upfront and an annual mortgage insurance premium (MIP). Both can be “rolled into” the mortgage loan, which means they increase the size of your monthly payments.

We’ve written an in-depth article on FHA mortgage insurance, if you’d like to learn more about it.

Choose the Best Financing Strategy for Your Situation

Ultimately, you have to choose the mortgage option that works best for you, given your unique situation. That might be a conventional loan, a VA-guaranteed mortgage, or the FHA program. Some home loans are a good fit for certain borrowers, but less appropriate for others. It’s not a one-size-fits-all situation.

The bottom line is, you should choose the mortgage product that’s right for you. And eventually, you’ll find a seller who is happy to accept it.

Questions? If you have questions about Bay Area FHA loans, or if you’d like to apply for a mortgage, please contact our staff. Bridgepoint Funding offers a broad range of financing options, including both conventional and government-backed home loans.