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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. What is an FHA Loan, and How Do They Work?

MORTGAGE

What is an FHA Loan, and How Do They Work?

What you'll learn: The ins and outs of an FHA mortgage

EXPECTED READ TIME: 7 MINUTES

July 21, 2022

If you are in the market for a mortgage, you may have heard of an FHA loan. These loans can be an excellent way for buyers to purchase a property (even their first) with a small down payment and lower credit scores, but they have some conditions. Let's see how these valuable mortgages work.

How do FHA Loans Work?

The Federal Housing Administration (FHA) provides approved credit unions, banks, and other mortgage lenders with a guarantee for certain loans made to homebuyers (they don't have to be first-time buyers) that cover the mortgage lender in case of default. These FHA loans require a smaller minimum down payment, and borrowers can also be approved with lower credit scores than would generally be required of a conventional loan.

These differences mean that FHA loans have been designed to help those with low to moderate incomes become homeowners. Because of that, they are popular with first-time home buyers. These mortgages with more lenient guidelines for borrowers also come with additional requirements.

FHA Loan Requirements

FHA loans can be used to purchase or refinance several types of dwellings. These include:

  • Single-family homes
  • Duplexes, triplexes, and fourplexes
  • Condominiums (on approved condo list)
  • Some manufactured homes on permanent foundations (not all lenders lend on these)

There are also FHA loans that can be utilized for new construction, renovating existing homes, and buying and renovating a property.

FHA loans have limits that vary by county for single-family properties. Multi-family dwellings and homes needing renovations have their limits also.

The FHA loan must be for a principal residence with a borrower occupying the property within 60 days of closing. It cannot be for investment, except for a multi-family with the borrower occupying at least one unit.

Unless it is a renovation, the property must meet minimum property standards.

FHA mortgages also have mortgage insurance premiums. One is paid upfront. The other is paid monthly.

What Does an FHA Loan Mean for a Buyer?

If your credit score is 580 or above, you can borrow up to 96.5% of the home's value with an FHA loan. That means you only need a down payment of 3.5%.

An FHA loan is still possible for borrowers with scores between 500 and 579, but a 10% or greater down payment is needed. Many lenders still require a minimum credit score of 580.

The down payment for an FHA loan can come from savings, a gift from a family member, or a down payment assistance grant (from the state or another source).

FHA loans look at two ratios:

  1. Total mortgage payment to effective income ratio (PTI or "Front End debt ratio") is the value of the proposed mortgage divided by income.
  2. Debt to income ratio (DTI) is the percentage of pre-tax income spent on monthly debt payments (mortgage/rent, credit cards, student loans, and other debts.)

FHA loans have no minimum or maximum salary requirements for qualification, but buyers must have:

  • A minimum of two established credit accounts (credit cards, auto, student loans).
  • No delinquent federal debt or any debt from another FHA-insured mortgage.
  • Down payment gifts must be verified in writing by the donor.

What Does an FHA Loan Mean for a Seller?

 

Not all properties are possible for FHA loans, and there are some requirements (called minimum property standards) to help the buyer and the mortgage holder. FHA loan properties must meet soundness, security, and safety standards, including but not limited to critical elements like electrical, roofs, water heaters, and access to the property.

If they do not affect the home's soundness, safety, or security, then repair minor defects, cosmetic issues, or normal wear and tear is not needed. However, sometimes to meet the standards, the seller must make repairs. If this is impossible, the buyer can use an FHA 203(k) loan to purchase and renovate the property.

Do I Qualify for an FHA Loan?

Borrowers should be aware that even if a lender follows FHA guidelines to the letter and meets the minimums, it does not mean that a lender will give you a loan. They will have their own set of guidelines.

Additionally, you may find better terms (lower down payment, higher existing debt allowance) if your credit score is higher with a conventional loan. And the mortgage rates will also be better with a more robust credit score saving you thousands over the life of the loan.

FHA Loans are Great for the Right Borrower and Property

If you and your desired property fit into the criteria suitable for FHA loans, they can be a great way to get into a new home or refinance your current home. If your credit score is higher or you have a significant down payment, you may be eligible for a conventional loan that matches your needs, credit, and financial position.

It is good to shop around and find the best deal that fits your needs and capabilities.

As you can see, an FHA loan can be the perfect mortgage to get your foot in the door. Then once you’ve improved your credit and gained some equity, you can always consider refinancing into a conventional home loan.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

What to Look for When Buying a House

Learn tips for buying a house and what to look for when buying a house. From roofs and foundations to windows and doors. Read on to learn what questions to ask.
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Basics of Self-Employed Mortgage Loans

Getting a mortgage when you're self-employed can be challenging. Read on to find out what documentation you'll need and how to be successful.
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FHA Streamline Refinances

All about FHA streamline refinances from guidelines, credit requirements, closing costs, zero-cost loans, and more.
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Top Home Renovation Ideas

The weather is perfect for home improvements, from interior renovations to home additions and exterior upgrades. Discover our top picks in all price ranges.
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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

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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IMPORTANT NOTICE

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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