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FHA loans allow borrowers to purchase a home without the need for a large down payment or a high credit score.

These loans are backed by the Federal Housing Administration, an agency that works under the Department of Housing and Urban Development. Because of the FHA guarantee, lenders who issue this type of financing are protected if you default on your loan. As a result, they can be more lenient about the requirements needed to buy a home.

This makes FHA loans a popular choice for first-time buyers and those whose credit or finances would make it difficult to qualify for a conventional home loan.

How to Apply for an FHA Loan

The good news is that applying for an FHA loan is typically easier than applying for a conventional loan. You won’t have to save for a bigger down payment or contend with high credit score requirements.

When applying for an FHA loan, borrowers must provide certain information to an FHA-approved lender. The lender then evaluates this information based on FHA criteria and the lender’s own requirements.

The usual process for applying for an FHA loan goes as follows:

1. Research FHA Loan Requirements

As a borrower, your first step should be to research FHA loan requirements. Understanding the eligibility requirements will help you decide if this is the right home loan option for you right now.

While requirements can vary slightly across lenders, you will generally need:

  • Proof of a reliable income stream
  • A credit score of at least 580 (although some lenders may want a higher score)
  • A down payment of at least 3.5% of the home's price

2. Find an FHA-Approved Lender

The next step is to find an FHA-approved lender. The majority of banks and mortgage companies offer this type of loan, so it shouldn’t be too difficult to find a qualifying lender. You can apply for an FHA loan at a bank, with an online mortgage lender or other private lender as long as they’re FHA-approved. Just be sure to find a lender that fits your needs and that you can meet their requirements before applying.

3. Provide Necessary Documentation

Once you’ve selected a lender, you will need to start preparing the necessary documentation. Lenders all require some basic personal and financial history as well as the property details of the home you wish to purchase.

The information you'll be required to provide may include the following:

  • Your full name
  • Your social security number
  • A copy of your driver’s license
  • Income information
  • Employment history
  • Property address
  • Purchase price of the property
  • Down payment amount

Without this documentation, the lender will not be able to proceed with your application. To avoid delays, it’s best to gather this information before you start applying.

4. Complete Loan Application

The next step in the process is to complete a Uniform Residential Loan Application, also known as the Fannie Mae Form 1003.

In this form, you must provide the property address and type of loan you want, as well as information regarding recurring debts, income sources, income amounts, housing expenses and previous/current employment.

At this point, you may also need to pay a fee for the mortgage application. If not, it will be included in the closing costs. This will depend on the lender, so be sure to check their policy.

5. Compare Loan Estimates

This is an important step if you are applying to multiple lenders. You will want to compare each lender’s loan estimate (LE) to get the most favorable offer.

LEs are designed to make the loan process transparent. They will break down important elements of the offer such as the interest rate, monthly payments, closing costs and other information you need to make your decision.

How to Get Approved for an FHA Loan

Applying for an FHA mortgage is relatively straightforward. However, you will find it easier to get approved if you’re prepared to meet each of these requirements:

  • Credit score and history: FHA loans require a minimum credit score between 500 and 580. Most lenders require 580, but some will expect a higher score. In most cases, lenders do not like to see more than one 30-day late payment within the past 12 months. Lenders will also usually refuse borrowers with a foreclosure in the last three years, or a recent bankruptcy.
  • Down payment: FHA loans require a minimum down payment of 3.5%. If your credit score is less than 580, FHA lenders may require a down payment of 10%.
  • Closing costs: Some costs are payable to the lender and others involved with the loan process when closing a loan. These fees are typically between 2% to 6% of the home’s sale price. These costs must be paid by the borrower and can include lender fees, mortgage insurance, prepaid items and third-party fees. The costs will vary by location and in most cases, are paid in addition to your down payment. However, they can also be rolled into the loan itself so you can avoid paying them upfront.
  • Debt-to-income ratio (DTI): One thing lenders will look at is how much debt you have in comparison to your income. For FHA loans, this ratio must not exceed 45% because the lender might deem the mortgage unmanageable in your financial situation. Anything above this and many lenders will reject your application.
  • Loan-to-value ratio (LTV): This ratio is the value of the loan compared to how much the home is worth. For FHA loans, your LTV must be 96.5% or lower. This means that your down payment must be at least 3.5% and you can’t borrow more than 96.5% of the home’s value.
  • Mortgage Insurance Premium (MIP): Mortgage insurance is a fee paid by homeowners who take out FHA loans. It’s used by FHA lenders to protect themselves against higher-risk borrowers (with lower credit scores and down payments). Lenders require both an upfront premium, which must equal 1.75%, and an annual premium of a rate between 0.45% to 1.05%, paid in monthly installments.

When to Apply for an FHA Loan

Only you can answer this as it will depend on your own financial circumstances and the lender you choose.

Before you apply for an FHA loan, you must show proof of at least 12 consecutive months of on-time payments for all financial obligations. Lenders want to see that you’ve consistently paid your rent/mortgage, bills, any debt you owe and other necessary expenses.

Aside from that, the ideal time to apply for an FHA loan is when you can meet the general requirements. It’s best to only apply once your credit score has reached at least 580 (ideally higher), and you have enough saved for a 3.5% down payment at your desired loan amount.

Following the guidelines above is a great place to get started. For additional information or to proceed with an FHA home loan application, speak with one of our lenders today.