How to Apply for an FHA Loan

FHA loans are often thought of as a mortgage for first-time homebuyers only. But this is not the case. This type of government financing may be the preferable option for anyone interested in buying a home who does not have a great credit score.  

Check the FHA Guidelines to See if You Qualify

An FHA loan might be the answer for many borrowers who may not be approved for a conventional mortgage. That’s because the FHA requirements are less stringent. You can get an FHA mortgage with a credit score of 500 or more.

A score of 579 and below (down to 500) will require a 10% down payment. And for those with scores of 580 or above, a down payment of only 3.5% is possible.

Conventional mortgages will usually require a buyer to have a credit score above 620. Anyone with a 740 or higher will likely want to choose a conventional loan due to lower down payments and better rates.

Keep in mind, if you have a credit score in the 500s, the option to extend you a mortgage is still up to the lender, and the higher the score, the better terms you will be offered.

More FHA Guidelines

Beyond the credit score and down payment, the other qualifying factors are as follows:

1. A debt-to-income ratio (DTI) under 43%:  The DTI measures your total debt to your total income. The lower, the better. It means you have more money to put toward a new debt. Most lenders will require a 43% or lower. Some lenders may accept a 50% DTI.
2. FHA loan limits: This is the maximum amount available to borrow, and it changes each year and depending on the home location. In 2022 the FHA mortgage limits are between $420,680 and $970,800. Property types will have different limits (single vs. multifamily).
3. FHA appraisal: Every home purchased with an FHA mortgage must be appraised by an "approved appraiser," ensuring it meets minimum property requirements.
4. Mortgage insurance premium (MIP): Borrowers must pay (or roll into their monthly payment) mortgage insurance premiums. This insurance protects the lender in case of default.
5. Two years of employment history: Lenders must verify the borrower's employment for the most recent two years. A borrower's income is typically considered stable when they have been employed at their current job for six months or more.
6. Non-occupying co-borrowers allowed: At least one obligated borrower must live in the home as a primary residence. If there are two or more borrowers, but one or more is not living in the property, the maximum mortgage is a 75% loan-to-value (LTV).
7. State of residence age requirement: Borrowers must meet your state's legal age requirement, usually 18.

Gather Your Documents

After submitting a mortgage application, several documents will be required to verify the provided information. Being prepared and organized will ensure the process goes smoothly. Below are the documents you will need, for sure. Although, the lender may require other documentations before final loan approval and closing.

• Bank statements (60 Days)
• Pay stubs (30 days +)
• Previous two years of W2 tax forms, for self-employed borrowers Schedule K-1 (Form 1065)
• Income tax returns, 2-years
• Asset account statements (retirement savings (401k, IRA), stocks, bonds, mutual funds, etc.)
• ID (Driver's license or U.S. passport)
• Divorce documents (to use alimony or child support as qualifying income)
• Gift letter (if funding your down payment with a financial gift from a relative or grant, must provide bank statements of source and transfer of cash funds from giver to receiver)

Are FHA Loans Good?

FHA loans are outstanding for anyone that wants a home but does not have a high credit score. FHA mortgages are a favorite of first-time homebuyers but not exclusive to them. Those with an established credit history and score above 720 will usually be better off with a conventional loan.

FHA's can also be a great option for someone wishing to finance a multifamily unit they will live in. If a borrower lives in a unit, an FHA loan can be used to purchase up to a fourplex. This way, the renters of the other units can help pay for the loan with their rent, and the borrower will have a lower total cost.

Do FHA Loans have PMI?

FHA loans have mortgage insurance. However, it's not called PMI. It is MIP - mortgage insurance premium. MIP works a bit differently from PMI. With PMI, you will pay this insurance every month until 20% of the loan amount has been paid and request it be canceled (or it automatically cancels at 22%).   

With MIP, it depends on the down payment. For a down payment of under 10%, MIP is paid for the loan's entire life. With a 10% down payment or more, the MIP is paid for the first 11 years. You must also pay differently; first, an upfront MIP (UFMIP) is paid at the closing, and an annual MIP, is calculated every year and paid over 12 months.

The 2022 UFMIP rate is 1.75% of the FHA loan. If you borrow $250,000, your UFMIP would be $4,375. The UFMIP is part of the total closing costs, including your mortgage principal, interest, property taxes, and homeowners insurance. But you can roll the cost of the UFMIP into your escrow payments, paying it over time. The 2022 annual premium is 0.85% for most FHA loans.

Types of FHA Loans

Not all lenders offer all FHA loans, but here is a list of the available FHA loans:

1. Traditional Mortgage
   A mortgage for financing a primary residence. Single-family up to a fourplex.
   
2. Home Equity Conversion Mortgage
   A reverse mortgage allows homeowners age 62+ to exchange their home equity for cash.
   
3. 203(k) Mortgage Program
   A mortgage with extra funds to cover repair costs, renovations, and home improvements.
   
4. Energy Efficient Mortgage Program
   A mortgage with funds for energy-efficient home improvements.
   
5. Section 245(a) Loan
   A Graduated Payment Mortgage (GPM) low initial monthly payment increasing over time. The monthly principal payment increases are meant to shorten the loan term.

Info courtesy of U.S. Department of Housing and Urban Development

Summary

FHA loans can be a fantastic option for first-time homebuyers or anyone with a lower credit score. Before applying, make sure you have the minimum requirements and can supply all of the needed paperwork. Also, talk with a loan officer to help you confirm that you are a good candidate or if there is another loan option that will better suit your situation and needs. They will be happy to help you find the right choice that can best get you into a new home.

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