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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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FHA LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. Top 10 Advantages of FHA Loans

MORTGAGE

12 Benefits of FHA Loans and FHA Loan Advantages

What you'll learn: 12 FHA loan benefits including low down payments and competitive interest rates

EXPECTED READ TIME: 10 MINUTES

Updated March 20, 2023

Advantages of FHA Loans

 

One of the primary purposes of a Federal Housing Administration (FHA) loan is to help make homeownership more possible for those buyers who may not qualify for a conventional mortgage. FHA loan benefits are numerous, from low down payment requirements to competitive FHA rates.

Though there are certainly pros and cons of an FHA loan, in this article we’ll focus on the reasons these mortgages are an important tool for millions of homeowners throughout our country. Following are our top 12 benefits of an FHA loan.

1. Easier credit qualifications

FHA loan requirements are less strict than they are for a conventional loan. It's one of the easiest loans to qualify for, especially if you have less than perfect credit.

The FHA minimum credit score is 500, however, this comes with a required loan-to-value ratio (LTV) of 90%. But lenders are allowed to set their own minimums, called overlays. A common lender overlay is an FHA credit score of 620.

Qualifications for an FHA loan are even more accessible because of compensating factors. This means that you can submit proof of additional factors to strengthen your application and prove your creditworthiness.

Acceptable compensating factors for an FHA loan include:

  • Verified cash reserves
  • Minimal housing payment increase
  • Low debts
  • Residual income
  • Substantial non-taxable income
  • Increased earning potential

2. Shorter time to qualify after negative credit

Still concerned about obtaining an FHA loan with bad credit? It’s true that past bankruptcies and foreclosures can make getting a mortgage more challenging. But with an FHA loan, you don't have to wait as long to get a mortgage after you've had a major credit event.

Let's compare the waiting period of the FHA and conventional loans.

 

 

FHA Loan

Conventional Loan

Chapter 7 Bankruptcy Waiting Period

2 Years Since Discharge

4 Years Since Discharge

Foreclosure Waiting Period

3 Years

7 Years

This means that borrowers who have had significant credit events have a better chance of getting an FHA loan sooner.

3. Low down payment

FHA loans require a down payment, but it’s likely you need less time to save up for your home than you imagined. FHA mortgages are designed to help borrowers who may not have 20 percent to put down, especially in pricier markets where this can represent a barrier to homeownership.

FHA loan down payment requirements are based on credit score. Those with a credit score below 580 are required to come up with a higher down payment. Because many lenders require a credit score above 580 to qualify for an FHA loan, 3.5 percent down is very common.

 

Credit Score

FHA Minimum Down Payment

580 and higher

3.5%

500–579

10%

 

Here are some examples of how much a 3.5 percent down payment would be:

  • $200,000 condo: $7,000 down payment
  • $250,000 townhome: $8,750 down payment
  • $300,000 single-family home: $10,500 down payment

4. More lenient on gift funds

If you don't have money for a down payment, it's acceptable to get help. FHA loan down payment requirements allow gift funds to come from family, close friends, an employer, a union, or government down-payment assistance programs. Those rules are not as strict as those of conventional loans, which only accept gift funds from relatives.

But it must indeed be a gift. There can't be any expected repayment.

Once you have someone or an organization ready to give you down payment money, you'll need to document it in a gift letter. Your loan officer can show you an example.

5. Low (or no) closing costs

Here's even more money-saving news: A seller can pay up to 6 percent of the sales price toward some of a buyer’s closing costs. FHA loan closing costs can average 3 to 5 percent of the loan amount. Negotiating to have the seller pay for some of these can help you get into your home with less out of pocket.

Closing costs can include:

  • Property taxes
  • Escrow fees
  • Homeowners insurance
  • Title insurance
  • Lender fees

There are other creative ways to pay less money up front. Some closing costs can be rolled into your loan. Another option is with lender credits: You pay a slightly higher interest rate; in exchange, your lender gives you a credit that helps cover your closing costs.

Talk to your real estate agent and loan officer if you'd like to negotiate or finance closing costs. Each will work on your behalf to find the best solution for you.

6. More affordable FHA mortgage insurance

Have you heard that mortgage insurance is a drawback of FHA loans? Take heed: FHA mortgage insurance is actually what makes it possible for millions of Americans to become proud homeowners!

The FHA doesn't issue loans. Instead, they offer lenders mortgage insurance. This insurance, referred to as an FHA mortgage insurance premium (MIP), protects the lender from default.

The length of time you pay your MIP depends on your down payment. For a down payment of less than 10 percent, MIP is paid for the loan's entire life. With a 10 percent down payment or more, the MIP is paid for the first 11 years.

There are two types of MIP:

  • Up Front Mortgage Insurance Premium (UFMIP) – Upon closing on an FHA loan, there is an upfront mortgage insurance premium of 1.75 percent of the loan amount. This can be rolled into the loan or paid as a closing cost.
  • FHA Monthly Insurance Premium (MIP) – There is also an annual MIP that can range from 0.15 percent to 0.75 percent depending on your loan parameters. This is usually split into monthly installments as part of your mortgage payment.

Mortgage insurance applies to conventional loans, too, if your down payment is less than 20 percent. And if your credit score is less than 680, that mortgage insurance can be pretty expensive. If you’re comparing the two, FHA mortgage insurance is typically the more affordable option. It’s always possible to remove MIP by refinancing to a conventional loan once you reach 20 percent equity, as many FHA borrowers do.

7. Lenient FHA debt-to-income ratio

FHA loan income requirements look at your debt-to-income ratio (DTI). This ratio compares your total debt and your gross income (before taxes). The lower, the better. A lower DTI means you have more money to put toward a mortgage payment. Most FHA lenders will require DTI to be 43 percent or lower. Some lenders may accept a 50 percent DTI with compensating factors.

DTI includes your housing costs and recurring bills like credit cards and car loans. If your income is $4,500 per month, your monthly debts can’t exceed $1,935. ($4,500 x .43 = $1,935). That amount includes your mortgage payment (principal, interest, taxes, and insurances), credit card minimum payments, auto, and installment loans.

To see how the following scenarios lead to an acceptable or unacceptable FHA DTI, divide the total monthly debts by the monthly income. For example: $2,628 ÷ $6,500 = .404

Monthly Income

Recurring Bills

Total Monthly Debts

DTI Ratio

Qualify?

$4,500

$400 car payment

$200 credit cards

$1,250 mortgage

$1,850

41.1%

Yes

$5,000

$600 car payment

$200 credit cards

$1,750 mortgage

$2,550

51%

No

$6,500

$500 car payment

$100 credit cards

$2,028 mortgage

$2,628

40.4%

Yes

8. Non-occupant co-borrowers accepted

With an FHA home loan, a borrower can be on the loan even though they're not going to live in the property. That's called a non-occupant co-borrower. This arrangement works well if you, the primary borrower, can't qualify because you don't have enough income.

So, a parent can help their child buy a home even if they live across the country. The underwriter will take the co-borrower's income into account. A child can also help a parent or other sibling.

Here's what the FHA says about who can be a co-borrower:

  • Borrowers related by blood, marriage, or law, such as spouses, parents/children, siblings, stepchildren, aunts/uncles, and nieces/nephews
  • Unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction

9. Low FHA rates

FHA loan interest rates are some of the lowest in the industry. If you have a credit score of less than 650, the FHA rate will almost always be lower than a conventional interest rate.

Interest rates are tied to the perceived risk that lenders anticipate in making a loan. The lender has less risk because they are backed by the Federal Housing Administration and covered by mortgage insurance, resulting in a more favorable interest rate.

Some of the best FHA loan rates are available through credit unions. Because credit unions are nonprofit, they may pass their tax savings on to their members in the form of lower interest rates for various loan products, including FHA mortgages.

10. Financing available for one- to four-unit properties

Did you know that FHA loans aren't just for one-unit properties? Eligible borrowers can purchase two-unit, three-unit, and four-unit properties.

But you must live in one of the units as your primary residence for at least one year. The advantage of this is that you can rent the other units out to help cover the mortgage – making the monthly payment more affordable.

One of the main criteria a lender will look at is if you have experience as a landlord. If you don't, this option may not work. Each case is looked at on an individual basis.

11. No income limits

Many low down payment options for conventional mortgages also include low income ceilings. Higher-earning borrowers make too much for these programs and, in most cases, need to put down 10 percent or more, which can add up to a significant amount.

With an FHA loan, there are no income limits restricting your chance of approval. This allows you to choose the loan that works for your financial needs no matter what neighborhood you’re focusing your home search in.

12. FHA lenders include credit unions

Applying for a home loan can be a high-pressure experience. While you want to be excited about the potential of the home you’re purchasing, your days are filled with gathering and submitting paperwork for mortgage underwriting. Working with a faceless, impersonal lender can make for a nerve-racking and frustrating experience.

By contrast, credit unions often offer personalized service for their members. You can call in or sit down at the local branch and ask any questions to better understand the approval process. While an FHA loan borrowed through a bank or online lender offers some advantages, credit unions may offer some distinct benefits. These include:

  • Low Rates and Fees – Most credit unions have a commitment to affordability, made possible by being member-owned and not subject to the shareholder pressures placed on publicly traded financial institutions.
  • Your Needs First – Credit union lenders are often focused on finding solutions and educating members to help them improve financially, especially if they’ve struggled in the past. They aren’t driven by sales goals that can come at the borrower’s expense.
  • One-Stop Shop – When you get a credit union FHA loan, you can also take advantage of money-saving accounts, loans, and services to support all of your financial services.

When you add it all up, FHA loans are designed to help all kinds of homeowners make their real estate dreams a reality. With lower costs and more availability for borrowers from a wide range of financial backgrounds, the FHA loan benefits reflect a commitment to making homes more affordable.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

What Is an FHA Loan?

FHA loans are great for first time borrowers, have lenient credit qualifications, and only require 3.5% down. Read on to learn about FHA mortgages.
couple moving into home

What Are the Different Types of Mortgages?

There are different types of mortgages for all financial situations. PenFed Credit Union provides details on different mortgages and which might be right for you.
couple researching on laptop together

Benefits of an FHA Mortgage

FHA loan benefits include low down payments, great interest rates, easier credit rules, and financing for 1-4 units. Read on to see if an FHA is for you.
family moving boxes

Why You Should Choose an FHA Loan

Think buying a home is out of reach? If you have a low or no credit score, high amounts of debt, or little savings, an FHA loan could be the solution for you.
wooden blocks
image

FHA LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of December 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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IMPORTANT NOTICE

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The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

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For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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