3 Reasons Dave Ramsey Doesn't Like FHA Loans

It could pay to listen to this advice.

Most people can't plunk down several hundred thousand dollars in cash to buy a home. That's where mortgages come in.

If you can't swing a regular mortgage because you don't have enough money for a down payment or can't meet the credit score requirements, you might consider taking out an FHA loan. These mortgages are backed by the Federal Housing Administration and are designed for borrowers with lower credit scores and less money for a down payment.

Usually, you need a minimum credit score of 620 to qualify for a conventional mortgage. With a FHA loan, you can borrow with a credit score as low as 500 if you can make a 10% down payment.

Furthermore, most conventional mortgage lenders want a 10% down payment on a home or higher (though some will accept 5% down). With an FHA loan, you can get a mortgage with as little as 3.5% down (though to do that, you'll need a minimum credit score of 580).

All told, FHA loans open the door to borrowing for a lot more people. Despite that benefit, financial expert Dave Ramsey doesn't love them for these key reasons.

1. They could lead to more debt

Dave Ramsey is a firm believer of keeping consumer debt to a minimum, or even avoiding it completely if possible. But FHA loans tend to lead to more debt.

Because these mortgages allow for a down payment as low as 3.5%, that means that as a borrower, you take on a higher mortgage balance. That debt could then end up hanging over your head for several decades.

2. They could result in higher long-term borrowing costs

When you take on a larger mortgage, you end up paying more interest than you would with a smaller loan. The result? You pay more over time.

Not only that, but FHA loans come with ongoing mortgage insurance premiums that add to your borrowing costs. That's on top of the upfront mortgage insurance premium you'll pay to close on your loan. All told, these are added expenses you may want to avoid.

3. They can make homeownership an option for people who really can't afford it

FHA loans are often touted as opening the door to homeownership for people who might otherwise get shut out. But whether that's a good thing is questionable.

The reality is that if your credit score isn't in good shape, it may be that you're not in a great position to take on more debt in the form of a mortgage. Furthermore, that low down payment option may not be such a good thing, because as Ramsey himself says, "If you're really that strapped for cash, you're not ready to buy a home."

Of course, there are exceptions here. You may be a borrower with strong credit and a great job who simply hasn't saved a lot for a down payment but can make a monthly mortgage payment with ease. If that's the case, you're in a different category. But if you're not financially stable, Ramsey thinks buying a home could end up being a big mistake.

Should you get an FHA loan?

FHA loans are a borrowing option worth considering if your credit score needs work or you don't have a lot of money to put down on a home. Just be sure to consider both the pros and cons when making your choice.