FHA loans can be ideal for buyers with less than 5% to put down; with credit scores below 720; who've recently gone back to work; or, for a combination of these reasons. They're especially good for buyers getting cash gifts for downpayment.
FHA mortgages offer low rates and flexible guidelines. This article explains how to apply.
What Is The FHA Mortgage Program?
The FHA mortgage program is technically an insurance program. This is because the FHA is not a mortgage lender -- it's an agency which provides insurance to lenders for defaults or loan foreclosures.
In order for a loan to be insurable, the lender must be FHA-approved and the specific loan must be underwritten to the standards set forth in the official FHA mortgage guidelines.
FHA mortgage guidelines are among the most forgiving of all mortgage loan types. There is no minimum credit score requirement. Downpayments can be as little as 3.5% on a home. The waiting period after a bankruptcy, short sale or foreclosure can be as little as 12 months.
There are other benefits, too.
All FHA-insured loans get access to the FHA Streamline Refinance program -- one of the simplest ways to lower your annual mortgage rate -- and homeowners with FHA financing can actually sell their homes with the loan attached. This is because FHA loans are assumable.
How To Get An FHA Mortgage
So, how can you get an FHA loan? Here’s a step-by-step guide to what you’ll need to do.
1. Discuss Your Ideas With A Lender
It's easy to research loans on your own, and that's a terrific way to begin educating yourself about mortgages. However, most information on the internet is general in nature and does not apply to your situation specifically. For example, you may earn non-standard income or show abnormal activity in your bank statements.
You can't know for certain whether you'll qualify for an FHA loan until you talk to a lender.
When you speak with a lender, he will review your financial situation with you and alert you to any ideas which may need to be addressed prior to closing. This can include talking through collection items on your credit report and judgments. During this stage, the more information that you share with your lender, the closer you'll be to getting FHA loan approval later on.
Note that you do not have to select your lender at this stage. It's just important that you speak to somebody who can assist,
2. Get Pre-Approved For An FHA Loan
After you've spoken with a lender, you'l want to begin the pre-approval process. As part of your pre-approval, the lender will tell you the maximum amount you can borrow with an FHA loan given your income, your debts and the expected monthly escrow of homes in the area.
Once pre-approved, your lender will provide you with an official pre-approval letter. Use this letter to prove that you can purchase homes up to a certain purchase price. Keep your pre-approval letter handy for your real estate agent and potential home sellers.
Pre-approvals are often provided at no cost, and asking for one does not obligate you to go ahead with the loan, or the lender.
3. Shop For A Home
There are many ways to shop for a home. You can work through a REALTOR®; you can search via the popular online real estate portals; you can use your local newspaper's real estate section; or, you can use a combination of all three. The good news is that you're pre-approved and know exactly what you can afford.
When you find a home and make a purchase offer, be sure your contract includes a "financing contingency". Financing contingencies allow you to cancel the contract in the event you are unable to secure a loan. Hopefully, your financing contingency won't need to be invoked but it's important to always have that protection.
4. Select Your FHA-Approved Mortgage Lender
Once you're under contract, it's time to turn your pre-approval into an actual approval.
First, shop for FHA mortgage rates. This is an important step because the FHA does not set mortgage rates -- lenders do. There can be a big difference in rates between lenders, too, so get at least two rate quotes. Get one of your rate quotes here.
After you've selected a lender, provide whatever paperwork that lender requests then let the lender do his job of preparing your loan for closing. During this time, an appraisal of your home will be ordered. This is not the same as a home inspection, though. You should still arrange to have the home inspected on your own. Home inspections can reveal physical defects in a home which you may not have noticed otherwise.
Your real estate agent can refer an inspector, if you need one.
5. Closing Your FHA Loan
Once your loan is approved, you'll be issued a "cleared-to-close" by your lender, and you'll be ready to go to settlement. Often called "closing", your settlement may occur at a title company near your home or office, or in an attorney's office, or in your current home -- each closing can be different.
After closing is complete, you will receive copies of your signed loan documents, which will include directions on where to send your payments and how to establish an auto-pay for your mortgage, if that's your preferred method of payment.
You will also receive keys to your new home.
Take Your First FHA Loan Step
FHA loans account for a significant share of the U.S. housing market and it's easy to understand why. The forgiving nature of the FHA mortgage guidelines, combined with the low rates available via the program, can make it a compelling mortgage option.