8 Steps to an FHA Loan – Plus 2 Bonus Tips!

Before you apply for an FHA loan

You’ve reviewed the FHA benefits and want to pursue this mortgage option. Now, where to begin? These first 4 steps will set up your foundation.

Step 1: Understand the FHA loan requirements

What are the qualifications for an FHA loan? To get approved for the loan, you must meet standards set by the FHA and your lender. Following are FHA requirements and common financial guidelines.

• Credit score – At least 500; preferably 620 for most lenders
• Debt-to-income ratio (DTI) – 43% or lower
• Proof of income – Documentation showing consistent income sources
• Down payment – At least 3.5%; gift funds are accepted
• Minimum property standards – Strict safety, durability, and usability standards verified by an FHA appraiser
• Primary residence requirement – Not available for second homes or investment properties

For a deeper dive, see tips on how to get an FHA loan.

Step 2: Find an FHA-approved mortgage lender

Though they are backed by the government, FHA loans are issued by private lenders like banks and credit unions.

Don’t limit your search to lenders that promise the lowest rates. You want to feel comfortable asking questions and confident in their experience handling the complexities of FHA loans. Ask questions about how often they process FHA loans, what type of loan they recommend for you, and what total costs are involved.

Step 3: Get prequalified for an FHA loan

Once you’ve found your FHA lender, or at least narrowed down the list, it’s time to get prequalified for a loan. Prequalification is not an official stamp of approval, but it will set the parameters of how much home you can likely afford.

The process usually involves your sharing some preliminary income details. The lender then completes a soft credit check to make that initial estimate (don’t worry, it doesn’t affect your credit score). Once you find a property and are ready to make an offer, they’ll work with you on preapproval, which requires more documentation and a hard credit check.

Step 4: Find an experienced FHA loan real estate agent

You’re not required to use a real estate agent, but they can be valuable during your homebuying experience. When you interview potential agents, let them know you plan to use an FHA loan. Make sure they have extensive FHA experience and can guide you through the process with confidence.

Your agent will eliminate properties that don’t meet FHA criteria and ones that fall outside the FHA mortgage limits in your area. When it comes time to make an offer, they’ll work on your behalf to negotiate the best possible deal – which may even include the seller paying some of your closing costs.

During the FHA loan process

Have you found “the” home, been preapproval for the loan, and have an accepted offer? The next set of steps will take you through the process from completing your application to closing on the house.

Step 5: Complete your FHA loan application

Mortgage application documentation varies based on the person and type of loan. Your lender will tell you what is needed for your situation. They may even have some of the information already available from your preapproval process.

FHA application documents:

• Government-issued ID
• Bank statements from the last 2 months
• Pay stubs from the last 30 days
• Tax returns – business and personal – from the last 2 years
• W-2s or 1099s for the past 2 years
• Retirement statements from the last 2 to 3 months
• Social security award letter

Your speed and quality of documents will help underwriters work efficiently as they review your application. We’ve compiled some tips to help. Be prepared to answer questions or provide additional details if further clarification is needed.

Step 6: Review your FHA loan estimate

Within 3 business days of receiving your application, your lender is required to provide a loan estimate. This 3-page document details important figures including your anticipated down payment, interest rate, monthly payment, and total closing costs.

A loan estimate is not an official approval or final offer of rates and costs. But it’s a helpful document to get a realistic view of what you’ll be responsible for paying if it moves forward. Take time to review the pages, ask questions, and compare choices if you’re still deciding between more than one lender. Now is the time to crunch the numbers and make sure you can afford the upfront costs and monthly payments.

Step 7: Schedule an FHA inspection and appraisal

The FHA may be lenient in credit and down payment qualifications, but they exercise strict standards when it comes to the condition of the property. Minimum property standards are in place to safeguard you from buying a home that’s unsafe or in need of expensive repairs.

What won’t pass an FHA inspection? FHA inspectors are trained to look out for specific safety and durability issues such as leakage, asbestos, and roof damage. They’ll also perform a traditional appraisal to estimate the home’s current market value.

Any number of issues can slow down the loan process during this step, including property safety concerns and the need to renegotiate an offer due to an appraisal coming in lower than the amount you agreed to pay.

Step 8: Sign and pay closing costs

This is where all the moving parts come together. Your loan is approved, the inspection has checked out, and your offer is set in stone. Time to make it official by signing on the dotted line and paying any necessary upfront costs.

FHA closing costs typically add up to 3 to 5 percent of the loan amount. That can sound like a lot when you’re trying to keep out-of-pocket expenses down. Fortunately, FHA loans are known for offering creative options to avoid high upfront costs. That’s another reason to work with an experienced FHA lender and real estate agent.

After FHA loan closing

Technically speaking, your work is now done. But you can make your FHA loan experience successful long-term with these 2 bonus steps: 

Step 9: Make on-time payments

Think of your monthly mortgage payment as more than a bill. Each payment improves your financial picture by:

• Reducing the loan principal – A lower principal means less of your payment will go toward interest each month.
• Building your home equity – Owning more of your home brings peace of mind and creates more options if you ever want or need to access the cash.
• Increasing your credit score – This is an important factor if you hope to get approved for a conventional loan in the future.

One great way to avoid missing any payments is to automate them. You can schedule recurring loan payments through your lender or with your own financial institution’s online and mobile banking service.

Step 10: Refinance to get rid of FHA MIP

FHA mortgage insurance premium (MIP) will expire automatically after 11 years only if you put 10 percent down on your loan. Since most FHA borrowers put down less than that, a common question is whether there is a way to avoid paying FHA mortgage insurance for the life of the loan.

The answer: Yes!

The solution is to refinance to a conventional loan as soon as you are eligible and can lock in a favorable rate. Strive for the following:

• Have at least 20 percent equity – This ensures you won’t have to pay the conventional version of MIP called private mortgage insurance (PMI).
• Reach a credit score of 620 –  Like we said in step 9, improving your credit score is necessary to make the switch to conventional.
• Lock in a lower rate – If you end up trading MIP for a higher rate, you may not actually come out ahead. A lower rate will also help offset the refinance costs.

Note, this step is completely optional. You do not need to refinance if you are comfortable with your current terms and payments.