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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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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

  1. Home
  2. Mortgage Knowledge Center
  3. How to Apply for an FHA Loan

MORTGAGE

How to Apply for an FHA Loan

What you'll learn: The documentation you’ll need, credit score requirements, and more when applying for an FHA mortgage

EXPECTED READ TIME: 9 MINUTES

July 28, 2022

FHA loans are often thought of as a mortgage for first-time homebuyers only. But this is not the case. This type of government financing may be the preferable option for anyone interested in buying a home who does not have a great credit score.  

Check the FHA Guidelines to See if You Qualify

An FHA loan might be the answer for many borrowers who may not be approved for a conventional mortgage. That’s because the FHA requirements are less stringent. You can get an FHA mortgage with a credit score of 500 or more.

A score of 579 and below (down to 500) will require a 10% down payment. And for those with scores of 580 or above, a down payment of only 3.5% is possible.

Conventional mortgages will usually require a buyer to have a credit score above 620. Anyone with a 740 or higher will likely want to choose a conventional loan due to lower down payments and better rates.

Keep in mind, if you have a credit score in the 500s, the option to extend you a mortgage is still up to the lender, and the higher the score, the better terms you will be offered.

More FHA Guidelines

Beyond the credit score and down payment, the other qualifying factors are as follows:

  1. A debt-to-income ratio (DTI) under 43%:  The DTI measures your total debt to your total income. The lower, the better. It means you have more money to put toward a new debt. Most lenders will require a 43% or lower. Some lenders may accept a 50% DTI.
  2. FHA loan limits: This is the maximum amount available to borrow, and it changes each year and depending on the home location. In 2022 the FHA mortgage limits are between $420,680 and $970,800. Property types will have different limits (single vs. multifamily).
  3. FHA appraisal: Every home purchased with an FHA mortgage must be appraised by an "approved appraiser," ensuring it meets minimum property requirements.
  4. Mortgage insurance premium (MIP): Borrowers must pay (or roll into their monthly payment) mortgage insurance premiums. This insurance protects the lender in case of default.
  5. Two years of employment history: Lenders must verify the borrower's employment for the most recent two years. A borrower's income is typically considered stable when they have been employed at their current job for six months or more.
  6. Non-occupying co-borrowers allowed: At least one obligated borrower must live in the home as a primary residence. If there are two or more borrowers, but one or more is not living in the property, the maximum mortgage is a 75% loan-to-value (LTV).
  7. State of residence age requirement: Borrowers must meet your state's legal age requirement, usually 18.

Gather Your Documents

After submitting a mortgage application, several documents will be required to verify the provided information. Being prepared and organized will ensure the process goes smoothly. Below are the documents you will need, for sure. Although, the lender may require other documentations before final loan approval and closing.

  • Bank statements (60 Days)
  • Pay stubs (30 days +)
  • Previous two years of W2 tax forms, for self-employed borrowers Schedule K-1 (Form 1065)
  • Income tax returns, 2-years
  • Asset account statements (retirement savings (401k, IRA), stocks, bonds, mutual funds, etc.)
  • ID (Driver's license or U.S. passport)
  • Divorce documents (to use alimony or child support as qualifying income)
  • Gift letter (if funding your down payment with a financial gift from a relative or grant, must provide bank statements of source and transfer of cash funds from giver to receiver)

Are FHA Loans Good?

FHA loans are outstanding for anyone that wants a home but does not have a high credit score. FHA mortgages are a favorite of first-time homebuyers but not exclusive to them. Those with an established credit history and score above 720 will usually be better off with a conventional loan.

FHA's can also be a great option for someone wishing to finance a multifamily unit they will live in. If a borrower lives in a unit, an FHA loan can be used to purchase up to a fourplex. This way, the renters of the other units can help pay for the loan with their rent, and the borrower will have a lower total cost.

Do FHA Loans have PMI?

FHA loans have mortgage insurance. However, it's not called PMI. It is MIP - mortgage insurance premium. MIP works a bit differently from PMI. With PMI, you will pay this insurance every month until 20% of the loan amount has been paid and request it be canceled (or it automatically cancels at 22%).   

With MIP, it depends on the down payment. For a down payment of under 10%, MIP is paid for the loan's entire life. With a 10% down payment or more, the MIP is paid for the first 11 years. You must also pay differently; first, an upfront MIP (UFMIP) is paid at the closing, and an annual MIP, is calculated every year and paid over 12 months.

The 2022 UFMIP rate is 1.75% of the FHA loan. If you borrow $250,000, your UFMIP would be $4,375. The UFMIP is part of the total closing costs, including your mortgage principal, interest, property taxes, and homeowners insurance. But you can roll the cost of the UFMIP into your escrow payments, paying it over time. The 2022 annual premium is 0.85% for most FHA loans.

Types of FHA Loans

Not all lenders offer all FHA loans, but here is a list of the available FHA loans:

  1. Traditional Mortgage
    A mortgage for financing a primary residence. Single-family up to a fourplex.
  2. Home Equity Conversion Mortgage
    A reverse mortgage allows homeowners age 62+ to exchange their home equity for cash.
  3. 203(k) Mortgage Program
    A mortgage with extra funds to cover repair costs, renovations, and home improvements.
  4. Energy Efficient Mortgage Program
    A mortgage with funds for energy-efficient home improvements.
  5. Section 245(a) Loan
    A Graduated Payment Mortgage (GPM) low initial monthly payment increasing over time. The monthly principal payment increases are meant to shorten the loan term.

  6. Info courtesy of U.S. Department of Housing and Urban Development

    Summary

    FHA loans can be a fantastic option for first-time homebuyers or anyone with a lower credit score. Before applying, make sure you have the minimum requirements and can supply all of the needed paperwork. Also, talk with a loan officer to help you confirm that you are a good candidate or if there is another loan option that will better suit your situation and needs. They will be happy to help you find the right choice that can best get you into a new home.

    •    Call 866-386-7254
    •    Visit Get my Rate

SIMILAR ARTICLES

About FHA Mortgage Insurance Premium | PenFed Credit Union

Get your questions about MIP answered, including how to remove it, how much it costs, MIP rates, tax-deductibility, and more.
fha mortgage insurance papers

Tips on How to Get an FHA Loan | PenFed Credit Union

See our tips for getting an FHA loan, what to do if you have not established credit, do not have down payment money, or have property problems.
handing keys to first time homebuyer

Top 10 Advantages of an FHA Loan | PenFed Credit Union

FHA loans have lots of amazing benefits. From easier credit, down payment, and gift fund rules, to great interest. Read on to see the top 10.
advantages fha loans

Benefits of an FHA Mortgage | PenFed Credit Union

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 with fha loan
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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You are leaving PenFed.org and entering a third party Website that is not a part of Pentagon Federal Credit Union.


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


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


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


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


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

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


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


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