FHA loans should often be avoided, especially by buyers with solid credit and a 10%+ down payment, due to mandatory lifelong mortgage insurance (MIP), strict property standards that disqualify many homes, and lower competitiveness in seller-favored markets. The upfront 1.75% fee and monthly premiums make them more expensive over time compared to conventional loans.
FHA loans aren't inherently bad, but their main drawbacks are the mandatory, often costly Mortgage Insurance Premiums (MIP) that can last for the life of the loan (if low down payment), stricter property condition requirements (no fixer-uppers), and limits on loan amounts, making them less ideal for those with excellent credit or who want to buy investment properties. They're better for buyers with lower credit scores or smaller down payments but can cost more long-term than conventional loans for those who qualify for better conventional terms.
Cracks in the foundation, signs of water damage, or evidence of settling can raise red flags. These issues often require a structural engineer's inspection, which can add time and cost.
Homes that may not pass an FHA inspection
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan.
One concern is that FHA loans have strict property requirements that might require the seller to make costly repairs. (More to follow on this.) Another concern is that FHA loans are more likely to “fall through” prior to closing, since they are often used as a last resort by borrowers with shaky credit.
Some sellers still look at FHA loans negatively, viewing them as loans of last resort for borrowers with weak credit. They worry that FHA deals are less likely to close because of this.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
The FHA 85% rule refers to a past guideline for cash-out refinances limiting the loan to 85% Loan-to-Value (LTV) and a specific rule for identity-of-interest transactions (like buying from family) where borrowers couldn't finance more than 85% of the home's value unless exceptions applied, such as renting from the family member for at least six months prior. While the general cash-out LTV is now 80%, the 85% rule still applies to certain related-party sales, requiring a 15% down payment unless an exception is met, notes FHA.com.
Key takeaways. FHA loan closing costs typically total 2 percent to 6 percent of a home's purchase price and are charged in addition to the down payment. FHA closing costs include an upfront mortgage insurance premium (MIP), lender and third-party fees and prepaid expenses.
FHA loans will not insure mortgages for properties that are being sold within 90 days of the previous sale date. If a seller bought the home and is trying to resell it within that window, FHA financing cannot be used by the new buyer — no exceptions.
A FHA Loan could be a good option for first-time home buyers of those with limited funds for a down payment and a lower credit score. Nevertheless, there are also some drawbacks to consider as well like private mortgage insurance.
Based on the latest report from HUD, the fund that backs the FHA's mortgage insurance currently holds more than five times what is congressionally mandated. By many measures, the FHA is a success story: it consistently makes a profit for the government and has a strong reserve.
Neither loan is universally "better"—it depends on your financial situation, but conventional loans are often better for those with good credit needing flexibility (investment properties, canceling insurance), while FHA loans are better for borrowers with lower credit scores or small down payments, as they offer easier qualification but come with stricter rules and perpetual mortgage insurance. Conventional loans can be cheaper long-term if you avoid mortgage insurance by putting 20% down; FHA loans have easier entry but ongoing costs (MIP).
FHA Loan: Cons
An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
FHA appraisal red flags buyers might not expect
A lot of what fails an FHA inspection is generally pretty logical: older, unmaintained roofs, broken windows, exposed or faulty electrical, potential lead paint hazards, unsafe steps, barely working heat.
Understanding Mortgage Affordability in Canada
For insured mortgages in Canada, CMHC recommends a maximum GDS ratio of 39%. For a $90,000 salary (which breaks down to $7,500 per month), this means your housing costs shouldn't exceed $2,925 per month.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.