How to Get an FHA Loan
Make sure you qualify for an FHA loan., Meet with an FHA-approved lender in your area., Save money for a down payment., Sign up for mortgage insurance., Supply necessary documents., Complete an FHA loan application., Have the property appraised...
Step-by-Step Guide
-
Step 1: Make sure you qualify for an FHA loan.
FHA Loans are known for having looser requirements than normal home loans, but they do still have requirements.
You must be able to meet most, if not all, of these standards to qualify.
If you don't meet one of these standards, you can still potentially be approved for a loan if you can prove extenuating circumstances.You must prove that you have had 2 years of steady employment where your income has remained the same or increased.
Your credit score should be 620 or higher with fewer than 2 30-day late payments in the past 2 years.
However some lenders can accept a credit score of 580, which is the minimum credit score required by the FHA to insure a loan.
You cannot have declared bankruptcy in the past 2 years or had a foreclosure in the past 3 years.
If you have, you will likely not qualify for an FHA loan unless your credit has been perfect since.
FHA Loans are available only for primary residence occupancy.
You have to intend to live in the property you're buying.
You must also, of course, have the cash to pay the down payment on your loan (generally
3.5% of the total cost of the loan). -
Step 2: Meet with an FHA-approved lender in your area.
Not just any lender can give you an FHA loan.
Only certain federally-approved lenders can offer these special loans.
To get started, find a lender near you who is authorized to make FHA loans.
You can find a lender near you by using the FHA Lender finder available on the United States Department of Housing and Urban Development (HUD) website., Almost every home loan requires a down payment
- a percentage of the loan's total cost paid up front.
While FHA loans have especially small down payments, they are no exception.
While it varies by location, FHA loans generally allow borrowers to obtain no more than
96.5 percent financing, which means you can expect to pay
3.5 percent of a home's cost up front.
There's no way around it
- you can't get the loan without making this lump-sum payment.
You can also ask a family member to make the payment on your behalf, though the family member must write a note indicating that this is a gift and not a loan.[[ , Because you are providing less than 5 percent of the cost of the loan in terms of a down payment, your loan is especially risky to the lender.
Therefore, you are required by law to have mortgage insurance to protect the lender.
The insurance covers some of the risk of you not paying back your loan if you default on your mortgage.
Mortgage insurance is different than hazard insurance, which protects you if something bad happens to your property.
Mortgage insurance is required to protect your lender.
FHA loan requirements state that you can finance (pay as part of your loan) the upfront portion of the mortgage insurance premium.
The annual mortgage insurance premium, however, cannot be financed. , To apply for a loan, you'll need to provide the FHA-approved lender with documents that prove your employment status, savings, credit and personal information.
The documentation that you'll need is fairly extensive, including job records, tax documents, and personal information.
Be prepared with the following when you apply for an FHA loan:
Addresses of the locations you've lived in the last two years.
The addresses and names of your employers for the last two years, plus the amount of your monthly salary.
Valid W2 forms for the past two years.
Income tax forms submitted for the past two years. , Your FHA-approved lender will be able to provide you with the correct application documents for your loan.
Fill the application out as carefully and as factually as you can.
If you don't know certain pieces of information, look them up.
Don't guess
- knowingly lying on federal documents is a crime.
You may want to get pre-approved for your FHA loan.
Talk to your lender about pre-approval
- if your credit history and financial situation are in good order, you're more likely to be pre-approved.
Before you fill out the application, you may want to look the document over to ensure you understand all the questions you'll be required to answer.
The application is available as a .pdf online., Even if your application is accepted, you can still be denied a loan if the property you wish to buy doesn't pass a proper appraisal and inspection by an FHA-approved appraiser.
The appraisal is performed for two reasons:
To ensure the property complies with health and safety regulations.
To determine the property's value, which also takes into account the value of similar homes in the area. , Be sure to read everything before you sign the final paperwork.
Never feel afraid to ask for clarification on anything you don't understand.
Closing costs, most of which can be financed, are generally
3.5 to 4 percent of the purchase price of your new home.
Closing costs are miscellaneous fees and expenditures associated with acquiring a home loan, such as attorney's fees, the fee for the property appraisal, title examination and insurance, prepaid interest, property taxes, the recording fees and others.
Take these into account when you're budgeting for your loan
- if you opt to pay up front, you'll need the money for these costs on top of the money for your down payment.
Expect to pay a loan origination fee of 1 percent or more of the value of the loan as well.
If they charge more, negotiate the terms down to 1 percent, less than 1 or choose a different lender. , FHA loans offer a variety of advantages, but they aren't for everyone.
Before you try to get an FHA loan, make sure you understand how, specifically, an FHA loan differs from normal loans.
Pros:
FHA Loans are, as a general rule, cheaper and easier to obtain than average home loans.
Your credit history isn't as strictly scrutinized for an FHA loan as it is for other types of loans, so, depending on the specifics of your situation, you may still be able to get a loan if you have a foreclosure or a repossession in your credit history.
FHA loans also require a smaller down payment
- about
3.5% of the cost of the house, as opposed to the 10-20% most loans other than USDA loans require.
Finally, FHA loans are "assumable"
- if you sell your home, the buyer can assume payments on your loan.
Note that you must wait several years after a foreclosure before you can get another loan.
Cons:
FHA loans require your house to pass a special inspection and appraisal process performed by an FHA-approved appraiser.
Also, because FHA loans, don't have the tight standards of normal loans, they require you to pay two kinds of mortgage insurance premiums.
These are:
Upfront Mortgage Insurance Premium (MIP).
Borrowers must pay this premium, which is
1.75% of the home loan, regardless of their credit score.
This can be paid as a lump sum or can be rolled into the mortgage payments.
Annual MIP.
This premium is figured into your monthly mortgage payments.
It is based on several criteria: your loan-to-value ratio, the size of your loan, and the timeline for paying off your loan. , You will need to provide your monthly income to an FHA-approved lender.
The lender will also investigate your monthly expenses (student loans, credit card debts, etc.) Lenders won't generally be allowed to give you a loan if the monthly payment on the loan requires too high a percentage of your income.To get approved for an FHA loan, your front-end ratio (your monthly housing expenses divided by your monthly gross income) has to be below 31%, although, with special justification, you may be able to get approved for a front-end ratio of up to 47%.
Your back-end ratio (debt to income ratio) has to be less than 43%.
As above, in situations with extenuating circumstances, you may be approved for a back-end ratio of up to 57%. , Still not sure? Don't make a decision about applying for an FHA loan before you completely understand what you're getting into.
Talk to a professional
- s/he will be able to help you decide whether an FHA loan is appropriate, based on the specifics of your situation.
The U.S.
Department of Housing and Urban Development (HUD) sponsors housing counseling agencies throughout the country designed to help you make informed decisions about housing, loans, your personal credit, etc.Search for a housing counseling agency near you via the HUD website's housing counselor locator.Alternatively, access the Housing and Urban Development (HUD)'s housing counseling hotline at (800) 569-4287. -
Step 3: Save money for a down payment.
-
Step 4: Sign up for mortgage insurance.
-
Step 5: Supply necessary documents.
-
Step 6: Complete an FHA loan application.
-
Step 7: Have the property appraised.
-
Step 8: Complete the FHA loan transaction by signing the closing papers.
-
Step 9: Know the pros and cons of FHA loans.
-
Step 10: Determine whether you can afford monthly FHA mortgage payments.
-
Step 11: Seek advice.
Detailed Guide
FHA Loans are known for having looser requirements than normal home loans, but they do still have requirements.
You must be able to meet most, if not all, of these standards to qualify.
If you don't meet one of these standards, you can still potentially be approved for a loan if you can prove extenuating circumstances.You must prove that you have had 2 years of steady employment where your income has remained the same or increased.
Your credit score should be 620 or higher with fewer than 2 30-day late payments in the past 2 years.
However some lenders can accept a credit score of 580, which is the minimum credit score required by the FHA to insure a loan.
You cannot have declared bankruptcy in the past 2 years or had a foreclosure in the past 3 years.
If you have, you will likely not qualify for an FHA loan unless your credit has been perfect since.
FHA Loans are available only for primary residence occupancy.
You have to intend to live in the property you're buying.
You must also, of course, have the cash to pay the down payment on your loan (generally
3.5% of the total cost of the loan).
Not just any lender can give you an FHA loan.
Only certain federally-approved lenders can offer these special loans.
To get started, find a lender near you who is authorized to make FHA loans.
You can find a lender near you by using the FHA Lender finder available on the United States Department of Housing and Urban Development (HUD) website., Almost every home loan requires a down payment
- a percentage of the loan's total cost paid up front.
While FHA loans have especially small down payments, they are no exception.
While it varies by location, FHA loans generally allow borrowers to obtain no more than
96.5 percent financing, which means you can expect to pay
3.5 percent of a home's cost up front.
There's no way around it
- you can't get the loan without making this lump-sum payment.
You can also ask a family member to make the payment on your behalf, though the family member must write a note indicating that this is a gift and not a loan.[[ , Because you are providing less than 5 percent of the cost of the loan in terms of a down payment, your loan is especially risky to the lender.
Therefore, you are required by law to have mortgage insurance to protect the lender.
The insurance covers some of the risk of you not paying back your loan if you default on your mortgage.
Mortgage insurance is different than hazard insurance, which protects you if something bad happens to your property.
Mortgage insurance is required to protect your lender.
FHA loan requirements state that you can finance (pay as part of your loan) the upfront portion of the mortgage insurance premium.
The annual mortgage insurance premium, however, cannot be financed. , To apply for a loan, you'll need to provide the FHA-approved lender with documents that prove your employment status, savings, credit and personal information.
The documentation that you'll need is fairly extensive, including job records, tax documents, and personal information.
Be prepared with the following when you apply for an FHA loan:
Addresses of the locations you've lived in the last two years.
The addresses and names of your employers for the last two years, plus the amount of your monthly salary.
Valid W2 forms for the past two years.
Income tax forms submitted for the past two years. , Your FHA-approved lender will be able to provide you with the correct application documents for your loan.
Fill the application out as carefully and as factually as you can.
If you don't know certain pieces of information, look them up.
Don't guess
- knowingly lying on federal documents is a crime.
You may want to get pre-approved for your FHA loan.
Talk to your lender about pre-approval
- if your credit history and financial situation are in good order, you're more likely to be pre-approved.
Before you fill out the application, you may want to look the document over to ensure you understand all the questions you'll be required to answer.
The application is available as a .pdf online., Even if your application is accepted, you can still be denied a loan if the property you wish to buy doesn't pass a proper appraisal and inspection by an FHA-approved appraiser.
The appraisal is performed for two reasons:
To ensure the property complies with health and safety regulations.
To determine the property's value, which also takes into account the value of similar homes in the area. , Be sure to read everything before you sign the final paperwork.
Never feel afraid to ask for clarification on anything you don't understand.
Closing costs, most of which can be financed, are generally
3.5 to 4 percent of the purchase price of your new home.
Closing costs are miscellaneous fees and expenditures associated with acquiring a home loan, such as attorney's fees, the fee for the property appraisal, title examination and insurance, prepaid interest, property taxes, the recording fees and others.
Take these into account when you're budgeting for your loan
- if you opt to pay up front, you'll need the money for these costs on top of the money for your down payment.
Expect to pay a loan origination fee of 1 percent or more of the value of the loan as well.
If they charge more, negotiate the terms down to 1 percent, less than 1 or choose a different lender. , FHA loans offer a variety of advantages, but they aren't for everyone.
Before you try to get an FHA loan, make sure you understand how, specifically, an FHA loan differs from normal loans.
Pros:
FHA Loans are, as a general rule, cheaper and easier to obtain than average home loans.
Your credit history isn't as strictly scrutinized for an FHA loan as it is for other types of loans, so, depending on the specifics of your situation, you may still be able to get a loan if you have a foreclosure or a repossession in your credit history.
FHA loans also require a smaller down payment
- about
3.5% of the cost of the house, as opposed to the 10-20% most loans other than USDA loans require.
Finally, FHA loans are "assumable"
- if you sell your home, the buyer can assume payments on your loan.
Note that you must wait several years after a foreclosure before you can get another loan.
Cons:
FHA loans require your house to pass a special inspection and appraisal process performed by an FHA-approved appraiser.
Also, because FHA loans, don't have the tight standards of normal loans, they require you to pay two kinds of mortgage insurance premiums.
These are:
Upfront Mortgage Insurance Premium (MIP).
Borrowers must pay this premium, which is
1.75% of the home loan, regardless of their credit score.
This can be paid as a lump sum or can be rolled into the mortgage payments.
Annual MIP.
This premium is figured into your monthly mortgage payments.
It is based on several criteria: your loan-to-value ratio, the size of your loan, and the timeline for paying off your loan. , You will need to provide your monthly income to an FHA-approved lender.
The lender will also investigate your monthly expenses (student loans, credit card debts, etc.) Lenders won't generally be allowed to give you a loan if the monthly payment on the loan requires too high a percentage of your income.To get approved for an FHA loan, your front-end ratio (your monthly housing expenses divided by your monthly gross income) has to be below 31%, although, with special justification, you may be able to get approved for a front-end ratio of up to 47%.
Your back-end ratio (debt to income ratio) has to be less than 43%.
As above, in situations with extenuating circumstances, you may be approved for a back-end ratio of up to 57%. , Still not sure? Don't make a decision about applying for an FHA loan before you completely understand what you're getting into.
Talk to a professional
- s/he will be able to help you decide whether an FHA loan is appropriate, based on the specifics of your situation.
The U.S.
Department of Housing and Urban Development (HUD) sponsors housing counseling agencies throughout the country designed to help you make informed decisions about housing, loans, your personal credit, etc.Search for a housing counseling agency near you via the HUD website's housing counselor locator.Alternatively, access the Housing and Urban Development (HUD)'s housing counseling hotline at (800) 569-4287.
About the Author
Terry Perez
A seasoned expert in education and learning, Terry Perez combines 10 years of experience with a passion for teaching. Terry's guides are known for their clarity and practical value.
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