How to apply for an FHA loan: Process and requirements

How do I apply for an FHA loan?

An FHA mortgage is a great way to buy a house without needing a big down payment or perfect credit score.

While they’re backed by the federal government, FHA mortgages are available from just about any private lender. So it’s easy to apply and shop around for low rates.

You can start your application online and even close online in some cases. Or you can work one-on-one with a loan officer for extra guidance. You get to choose your lender and how you want to apply.

Begin your FHA loan application process. Start here (Jan 16th, 2022)

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How to apply for an FHA loan

FHA loans are insured by the Federal Housing Administration, an arm of the Department of Housing and Urban Development (HUD).

Thanks to their government insurance, FHA loans can offer low down payments, looser credit requirements, and low rates to help low to moderate income buyers achieve their goals of homeownership.

Although FHA mortgages are insured by the FHA, this agency doesn’t actually lend money. You get an FHA loan from a private lender, just like you would a conventional loan.

So the first thing you need to do is choose a lender you want to apply with.

1. Find a lender

The first step to getting an FHA home loan is finding an FHA-approved lender. The good news is that the majority of banks and mortgage companies offer this type of mortgage, so finding a lender shouldn’t be too difficult.

You can get FHA financing from banks, mortgage brokers, credit unions, and online lenders. You can also use our review of the best FHA lenders as a starting point.

The right lender for you will depend on a few things. For instance, if you have a lower credit score, you want to make sure your lender accepts FHA’s minimum of 580 (some lenders set the bar at 600 or higher).

You should also think about how you want to work with your lender. Do you prefer person-to-person interactions? Look for a local lender that focuses on in-person and over-the-phone lending.

If you prefer to go it alone, on the other hand, there are a wide variety of lenders that will let you complete most or all of the mortgage process online.

Find an FHA-approved lender. Start here (Jan 16th, 2022)

2. Apply for an FHA loan

After finding a lender, the next step is to submit a loan application.

Many lenders let you apply online, though some will connect you with a loan officer to complete your application over the phone or via email.

Since mortgage terms and rates can vary from one lender to the next, you should contact multiple lenders to compare offers. This helps you find the best deal.

Ideally, you should request quotes from three to five lenders so you know you’re getting the best interest rate and lowest fees available to you.

Lenders will typically check your credit before providing rate information and issuing a pre-approval. But don’t worry too much about the effect on your credit score.

As long as you submit all your mortgage loan applications within a 45-day window, they’ll be reported as a single credit inquiry on your credit report, so your score won’t be dinged multiple times.

3. Provide basic details

Lenders will need basic personal information and property details to start your mortgage application.

When you initially apply for an FHA loan, be prepared to provide:

Your full name
Your Social Security Number
A copy of your driver’s license or other state-approved ID
Income information
Employment history
The property address
Purchase price of the property
Down payment amount

Once you’ve provided these basic pieces of information, the lender will request supporting financial documents to verify your income, savings, and debts. You can see a list of supporting documents you’ll be asked for below.

4. Compare Loan Estimates

After you submit a loan application, the lender must provide a Loan Estimate within three business days.

The Loan Estimate (LE) is a standard form used by all lenders. It’s designed to keep the loan process transparent by providing information about a borrower’s estimated interest rate, monthly mortgage payments, and closing costs upfront.

The LE also provides information on the loan type and loan term, so you know you’re comparing mortgage offers on equal footing. (For instance, an FHA loan with a 15-year term would have much higher payments than one with the same loan amount and a 30-year term.)

Make sure all your loan offers are quoting the same loan type, loan term, and loan amount. Then compare interest rates, annual percentage rates (APR), and upfront fees to find the best deal.

Compare FHA loans from multiple lenders. Start here (Jan 16th, 2022)

Documents needed to apply for an FHA loan

When you initially apply for an FHA loan, lenders will ask about your income, savings, debts, and assets.

Once you decide to move forward with the loan, they’ll need proof of the information you provided. That means submitting a variety of financial documents.

Borrowers are typically asked to provide:

Tax returns from the past two years
W2s from the past two years
Bank statements from the previous 60 days
Financial statements for other assets (investment accounts and retirement accounts)
Recent pay stubs
Proof of other income such as Social Security or disability income
Name and address of your employers over the previous two years
Year-to-date Profit and Loss statement, if you’re self-employed

The lender will also pull your credit score and credit reports. Authorizing a credit check allows the lender to view your credit history and verify your current debt load and minimum monthly payments.

Requirements to get approved for an FHA loan

Applying for an FHA mortgage is fairly straightforward. But how do you know if you’re likely to get approved?

The good news is, it’s easier to qualify for an FHA loan than many other loan programs. Here’s what you can expect.

Credit score: FHA home loans require a minimum FICO score between 500 and 580. (Most lenders require at least 580.) By comparison, a conventional mortgage requires at least a 620 FICO score
Credit history: You’re typically allowed no more than one 30-day late payment within the past 12 months. In addition, you shouldn’t have a foreclosure in the past 3 years or a recent bankruptcy
Down payment: FHA loans require a minimum down payment of 3.5% if your credit score is 580 or higher. If your credit score is between 500 and 579, you’ll need a minimum down payment of 10%
Loan-to-value ratio (LTV): LTV compares your loan amount to the home’s market value. This is another way to express down payment requirements; since at least 3.5% of the purchase price is required as a down payment, your loan-to-value ratio must be 96.5% or lower
Closing costs: You’re also responsible for closing costs, which are lender and third-party fees, such as origination or underwriting fees. Closing costs vary by location, but typically range between 2% and 5% of the loan amount. This expense is on top of your down payment, so you need to budget for both amounts
Debt-to-income ratio (DTI): Your DTI ratio is the percentage of your gross monthly income that goes toward monthly debt payments for things like student loans and credit cards. For an FHA loan, your DTI ratio typically shouldn’t exceed 45%. Lenders might allow a higher DTI if you have compensating factors such as an exceptional credit score or large cash reserves. Typically, you’re allowed to spend up to 31% of your gross monthly income on the house payment

Also keep in mind that FHA loans charge an additional fee called mortgage insurance premium (MIP). This is basically equivalent to the private mortgage insurance (PMI) paid on a conventional loan.

There are two MIP fees: an upfront mip (UFMIP) equal to 1.75% of the loan amount, which most borrowers roll into their loan balance, and an annual fee which is paid in monthly installments along with your mortgage payment.

FHA loan property requirements

The home you plan to buy needs to meet eligibility requirements, too.

For instance, the home must be a primary residence, meaning you plan to live there full time. It can be a single-family property or a multi-family home with up to 4 units (as long as you live in one yourself).

And your loan amount can’t exceed current FHA loan limits, which are $420,680 in most areas but higher in certain high-cost housing markets.

Verify your FHA loan eligibility. Start here (Jan 16th, 2022)

What happens after you apply for an FHA loan?

The typical timeline from application to closing with an FHA loan ranges from 30 to 45 days.

During this time, your loan file goes through underwriting. The underwriter takes a closer look at your application and reviews supporting documents to ensure you meet the minimum guidelines for FHA financing.

The underwriter will review your current debts and minimum payments, then calculate your debt-to-income ratio
The underwriter will review your bank statements and other assets to confirm that you have enough in reserves for the down payment and closing costs. If your down payment is coming from a cash gift or down payment assistance, you’ll need documents verifying the source(s) of the funds
The underwriter will review your previous tax returns and W2s statements to confirm a two-year history of stable, consistent income
The underwriter will review your recent pay stubs to confirm you’re still employed and earning income
The mortgage lender will schedule an appraisal to determine the home’s current market value. You cannot borrow more than the property is worth

Home inspection

You should also schedule a home inspection after getting a purchase agreement. A home inspection isn’t required for loan approval, but it’s recommended because it can reveal hidden issues with the property.

“This is more important with FHA prior to paying for the appraisal, if possible, as appraisers have stricter guidelines for FHA, and your home may not even be eligible for FHA if there are specific issues,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

If your offer was subject to a satisfactory home inspection, you can ask the seller to correct these issues before closing.

Underwriting

During the underwriting process, your lender might request additional information. Don’t panic — this is common when getting a mortgage.

For example, if your parents will gift your down payment and/or closing costs, your lender will request a gift letter. Or if you receive alimony payments, the lender might ask to see a copy of your divorce decree.

Submit requested information as soon as possible to keep closing on schedule.

Where can I apply for an FHA loan?

The FHA doesn’t offer loans directly, so you’ll need to contact a private lender to apply.

The majority of lenders are FHA-approved, so you’re free to choose a local lender, big bank, online mortgage lender, or credit union.

To find a good FHA lender, you can get recommendations from friends or family who’ve used an FHA loan. You can also check with the Better Business Bureau to review a bank or mortgage lender’s rating and read online reviews.

Keep in mind that credit requirements for FHA loans vary from lender to lender. While many lenders allow a credit score as low as 580, some might set their minimum at 600 or even higher. So if your score is on the lower end of qualifying for an FHA loan you might need to shop around a little more.

Regardless of credit score, you should find at least three lenders you like the look of and apply with them.

FHA mortgage rates can vary a lot between lenders, and you won’t know which one can offer you the best deal until you’ve seen personalized quotes.

Looking ahead: Refinancing an FHA loan

Looking down the homeownership path, many wonder if they will be able to refinance their FHA mortgages.

Homeowners absolutely have options to refinance an existing FHA loan, including:

Streamline Refinance: Homeowners with an existing FHA loan are able to use a Streamline Refinance to lower their rate and monthly mortgage payment. It’s faster than a conventional refinance and requires less documentation
Refinancing to a conventional loan: This is an refi option that helps homeowners drop their annual mortgage insurance premium (MIP) that is required for the life of the loan. Keep in mind that you’ll need to minimum credit score threshold and have at least 20% home equity to qualify

Start your FHA loan application

Applying for an FHA loan is pretty straightforward. Once you’ve chosen the lenders you want to apply with, their online systems and loan officers will walk you through the process step by step.

Make sure you have all your financial documents on hand to make the application process go as smoothly as possible.

Most importantly, apply with more than one FHA lender. This is the only way to be sure you’re getting the lowest-rate loan. Remember, even a seemingly tiny rate difference (0.125% or less) can cost you thousands of dollars over the life of the loan.

Luckily, many lenders offer online preapproval these days. So getting mortgage quotes and comparing rates can be relatively quick and painless.

Verify your new rate (Jan 16th, 2022)