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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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image

FHA LOANS

Rates starting at % (APR %)¹

 

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After your application, we’ll help you:

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

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  1. Home
  2. Mortgage Knowledge Center
  3. Pros and Cons of an FHA Loan - What You Need to Know

MORTGAGE

Pros and Cons of an FHA Loan – What You Need to Know

What You'll Learn:Is an FHA Loan Right for You? Let’s Look at the Pros and Cons.

EXPECTED READ TIME: 6 MINUTES

September 14, 2023

With ease of entry and money-saving benefits for borrowers, an FHA loan can make the dream of homeownership a reality for first-time homebuyers and those with less than perfect credit. But if you meet the criteria, does that always mean an FHA loan is right for you? Each of the FHA loan’s unique features has its pros and cons. Let’s take a closer look.

FHA credit qualifications

Known as the easiest mortgage loan to qualify for, FHA loans have less strict credit qualifications compared to their counterparts.

  • PRO: Low minimum credit score – The FHA sets a minimum credit score of just 500. Conventional loans usually require 620 or above.
  • PRO: Compensating factors – If your credit isn’t quite up to par, there are ways to strengthen your application. Things like low debts, verified cash reserves, and increased earning potential can help prove your creditworthiness.
  • PRO: Negative credit waiting period – If you’ve had a bankruptcy or foreclosure in the past, the waiting period to become eligible for a mortgage is shorter. You can qualify for an FHA loan two years after a chapter 7 bankruptcy and three years after a foreclosure.
  • CON: Lender overlays – Lenders can set their own credit requirements, called overlays. A common overlay is a minimum credit score of 620.

Low down payment

FHA loans are highly regarded for reducing upfront costs and making homeownership more attainable.

  • PRO: Minimum down payment – Qualified buyers can get an FHA loan for as little as 3.5 percent down. That’s a huge benefit if you have limited savings for a down payment or want to keep your cash on hand for closing costs and other expenses.
  • PRO: Lenient gift funds – If you don’t have enough to meet the minimum, it’s acceptable to get help from a family member, friend, employer, charitable organization, or government agency that offers down payment assistance. This is more lenient than conventional guidelines, which limit gift funds to family members.
  • CON: Need more down for better rates – The amount of down payment affects interest rates, so you may have to put more down to get a better FHA rate.

Low interest rates

Possibly one of the most attractive features of the FHA loan, reduced interest rates are available to borrowers who might not ordinarily receive this benefit with a conventional loan.

  • PRO: Below-average interest rates – With conventional loans, the best rates are usually reserved for those with high credit scores and those who can put 20 percent down.
  • CON: Higher APR – Remember to look at the full mortgage payment – including principal, interest, and mortgage insurance – when comparing your options. A low interest rate doesn’t always mean a better deal. Annual percentage rate (APR) takes into account additional expenses and is a better comparison of your full costs.

Low closing costs

There’s more good news if you’re trying to keep your out-of-pocket costs down. The FHA has creative options for closing costs, which typically add up to 3 to 5 percent of the total loan amount.

  • PRO: Lender credits – For a slightly higher interest rate, a lender may offer a credit to cover some closing costs.
  • PRO: Roll into loan – Instead of paying at closing, closing costs are spread out into your monthly mortgage payments.
  • PRO: Seller concessions – As the buyer, you can negotiate for the seller to pay up to 6 percent of the property sales price toward the closing costs. It’s best to discuss concessions with your real estate agent.
  • CON: Increased loan cost – FHA loans make buying a home more affordable upfront – and that’s a great thing for many homebuyers. Just be aware that it may mean you end up paying more for the loan in the long run.

FHA mortgage insurance premium

Offering loans with low down payments and lenient credit qualifications is risky for lenders. As an FHA borrower, you pay mortgage insurance premium (MIP) to protect the lender if you default on your loan.

  • PRO: Makes homeownership possible – Without the safety net of mortgage insurance, it’s unlikely lenders FHA loans would be as widely available.
  • CON: Adds additional costs – FHA loans come with an upfront mortgage insurance premium (UFMIP) of 1.75 percent and ongoing monthly MIP charges, typically 0.85 percent of the loan.
  • CON: Cannot be canceled – Conventional loans allow you to cancel private mortgage insurance (PMI) upon reaching 20 percent equity. MIP, on the other hand, cannot be canceled. Except in certain cases with a down payment above 10 percent, the only way to get rid of MIP is to pay off the loan or refinance out of an FHA loan.

Primary residence requirement

To be approved for an FHA loan, you have to live in the property as your primary residence.

  • PRO: Various residence options – You can use an FHA loan to purchase an approved single-family home, condominium, townhome, and manufactured home. Multi-family properties may also qualify if you live in one of the units as your primary residence and have experience as a landlord.
  • CON: Not for investments – The goal of the FHA is to help American families buy homes to live in. Second homes and investment properties are not eligible.

FHA property guidelines

Are you considering buying a foreclosure to fix and flip? There are strict requirements about the condition of FHA loan properties.

  • PRO: Avoids costly issues – The FHA sets standards for safety, security, and soundness. A bad roof, missing handrails, cracked window glass, and damaged exit doors are among the items deemed unacceptable within the FHA Minimum Property Standards.
  • CON: Can cause delays – Before closing, a property has to be reviewed by an FHA-certified appraiser and any issues must be addressed. This may slow down the process, but is in the buyer’s best interest.
  • CON: Fewer housing options – Strict property standards can reduce the pool of housing options available.

FHA loan limits

Loan limits are in place to protect borrowers from purchasing a home they can’t afford.

  • PRO: Limits updated annually – In 2022, the FHA loan limits range from $420,680 to $970,800, depending on the property location and the area’s cost of living. Before looking at houses, search for the current FHA loan limits in your area.
  • CON: Cannot exceed limit – If your heart is set on a property that’s more than your area’s limit, you’ll have to pursue a different mortgage type or continue the house hunt.

Curious, how much home you can realistically afford? Start with a mortgage affordability calculator.

Here to help weigh your options

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Top 10 Advantages of FHA Loans

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

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.
couple moving into home with fha loan

Tips on How to Get an FHA Loan

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

5 FHA Rules to Know Before Getting a Loan

Learn all about FHA loan rules, including FHA loan amount limits, residence requirements, insurance, and more.
fha rules
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 September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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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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