MORTGAGE KNOWLEDGE CENTER
PenFed Mortgage with Confidence
July 28, 2022
FHA Loan Advantages
The most significant difference between FHA and conventional loans is that the US government backs FHA loans. That means the lender is guaranteed to get their money even if you are to default. This attribute becomes your benefit because even if you have a lower credit score, down to 500, you can still obtain an FHA loan. With a conventional loan, usually, the lowest credit score is around 620.
However, most banks and other mortgage lenders will require a score of 580 and above for an FHA loan, but with this higher score, there are added benefits. With FHA loans, for scores of 580 or above, the borrower only needs a down payment of only 3.5%. For scores in the range of 500-579, these borrowers must put down a minimum of 10%. Also, the higher the score, the lower the rate you will be offered for a mortgage.
No matter what FHA loan you have, there is a requirement of paying a mortgage insurance premium (MIP). If you’re comparing an FHA loan with a conventional loan, you may be interested in our article, FHA vs. Conventional Private Mortgage Insurance.
Another advantage to an FHA loan is that it can be suitable for a real estate investment. You can purchase a multi-family property of up to 4 units, live in one, and rent the other three. If the rents charged are sufficient, the renters can pay most or all of the mortgage. Beyond this strategy, you can not use an FHA loan to build an investment portfolio.
How Many FHA Loans Can You Have?
It is commonly thought that FHA loans are only for first-time homebuyers, but this is incorrect. You can get as many FHA loans as you want throughout your lifetime. However, generally, you can only have one FHA loan at a time.
An FHA mortgage is strictly for primary residences, and you must be living in it or one of the units, if the property is a multi-family. This requirement means that you can usually not have more than one FHA loan at a time.
There are three exceptions though:
- Relocating to an area beyond a reasonable commuting distance (100 miles) from a current residence or affordable rental housing is unavailable.
- Leaving a jointly owned property to purchase a home, the co-owner will remain in the house (i.e., a divorce).
- Borrower cosigned an FHA loan and wants to purchase their own home.
If you have built up your credit (above 720), you will probably be better off obtaining a conventional loan.
Can I Build a House With an FHA Loan?
For those interested in building their own home, it is possible to do so with an FHA Construction Loan. The FHA offers two types of construction loans:
- Construction-to-Permanent (AKA one-time close loans) – Meant for buyers looking to build. This loan funds the construction then converts to a permanent loan like a traditional mortgage. The FHA requires only one closing for both loans.
- 203(k) rehabilitation – Designed to buy and renovate an existing home. Buy the home, and then can roll up to $35,000 into the mortgage to cover repairs, improvements, or other property renovations.
The 203(k) loan can be especially beneficial because an FHA loan requires that a property meets minimum standards for safety and soundness. Some properties will not pass these standards. But if a renovation loan is utilized, the repairs can be completed. And the property does not need to pass the requirements before the sale can close.
Is it More Difficult to Buy a Home With an FHA Loan?
The main issue buying with an FHA loan is the requirements of inspections that are generally meant to protect the borrower. Also, there are only 15 and 30-year mortgages available, which is not the same as the options available through conventional loans and may be an issue for some buyers.
FHA loans also have their minimum standards for a property's health, safety, and soundness. Those looking for a fixer-upper will use a 203(k) loan. And if too many units of a condo are not owner-occupied, buying a unit can also be challenging due to other restrictions.
The second main issue is that some sellers may be hesitant to sell to a buyer with an FHA loan. Because FHA loans are for those with lower credit scores and smaller down payments, these buyers are not considered as strong. So, the seller may be concerned the additional requirements of an FHA loan could either slow or potentially ruin a sale. This issue is significant in a hot market where buying could be challenging with an FHA loan. It may be worthwhile to find other financing if a credit score allows.
FHA Loans are Great for the Right Borrower
An FHA loan may be just what you need. Most lenders require a 580 credit score, and only a 3.5% down payment is needed. When you have a credit score of 720 or above, you are probably better off looking for a conventional loan. You will save on the rate and mortgage insurance.
SIMILAR ARTICLES
What are the requirements of an FHA Loan | PenFed Credit Union
Learn all about FHA loan requirements. From credit scores, down payment amounts, to house condition and PMI. Read on to see if an FHA loan is right for you.
Top FHA Frequently Asked Questions
Discover FHA loans with these frequently-asked questions. Learn the purpose of FHA loans, their benefits, how to apply and more.
FHA Streamline Refinances | PenFed Credit Union
All about FHA streamline refinances from guidelines, credit requirements, closing costs, zero-cost loans, and more.
What is an FHA Loan? | 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.
Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except 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 1.25 discount point, which equals 1.25 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 75%; 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.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except 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 1.375 discount point, which equals 1.375 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.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except 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 1.25 discount point, which equals 1.25 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 $450,000; loan-to-value ratio of 95%; 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.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except 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 1.25 discount point, which equals 1.25 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; 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.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer 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 Draw Period. During your Draw 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 7.875% for primary residences and second homes.
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.