Tips on How to Get an FHA Loan

Getting an FHA mortgage is just like obtaining any other loan. You apply and turn in your documentation. If everything looks good, you get a prequalification letter. Then you start shopping. Those are the exact steps that you'd take if you were applying for a most loans including FHA, VA, or conventional.

How easy is it to get an FHA loan?

Generally, an FHA loan is easier to get as far as borrower qualifications. But property requirements are stricter. Let's dig into this more.

FHA Borrower Qualifications

Although the FHA loan requirements fill hundreds of pages, there are generally five basic qualifications that borrowers need to be familiar with. 

1. Credit

Here's what the FHA says:

The Borrower is not eligible for FHA-insured financing if the Minimum Decision Credit Score (MDCS) is less than 500.

But that doesn't mean that an approved FHA lender would accept a score of 500. Besides following the FHA guidelines, each lender has its requirements. These additional requirements are called "overlays." For example, most lenders have an overlay that the minimum credit score they'll accept is 620.

2. Qualifying Ratios 

There are two different ratios an FHA underwriter considers:

• The ratio of the mortgage payment to gross income (before taxes). That ratio cannot exceed 31%. Mortgage payment includes principal and interest, property taxes, homeowner's insurance, mortgage insurance, homeowner association dues, and any special assessments.

Here's an example: Per HUD, the median family income in 2020 was $78,500. That's $6,500 a month. With that income, the total mortgage payment, including the costs mentioned, can't exceed $2,028 a month. If your gross family income is $5,000 per month, your total housing can't exceed $1,550.

• The other important ratio is the debt-to-income (DTI). Your DTI can't exceed 43% and includes your housing costs and recurring bills like credit cards and car loans. Here are two examples with the same income as above:

3. Occupancy

FHA funding is only for owner occupied properties. You can't use FHA funding to buy a second home, a vacation home, or investment properties. You can buy a duplex, triplex, or fourplex as long as you live in one of the units as your primary residence.

4. Down payment

The amount of down payment you'll need depends on your credit score. If your score is at least 580 you'll need 3.5%. If your score is 500 to 579, you'll need a 10% down payment based on the sales price of the property.

5. Income

Borrowers need a consistent income that they can document. That can include a job, self-employment income, social security, pensions, and child or spousal support.

How to Get FHA Loan with No Down Payment

The lowest down payment the FHA offers is 3.5% down. There is no zero down like the VA offers. But there are ways the borrower can get help paying for the down payment and even the closing costs.

• Gift funds are one of the main ways borrowers come up with their down payment money without paying for it themselves. The money has to be a gift and cannot be expected to be repaid. This gift can come from a relative, your parents, an employer, or charity. You'll need to document the contribution with a gift letter. There are also the local city, county, and state grants to help with down payment assistance. But these programs do take longer, and not all lenders work with them.
• Seller concessions can be up to 6% of the sales price of the home. These can go towards the closing costs but not the down payment.

How long does it take to get an FHA loan?

The answer to this can depend on many things, including the lender, the borrowers, the sellers, and the property.

When rates are extremely low like we see right now, lenders get backed up. The turn-around loan processing and underwriting can take longer. Plus, only FHA appraisers can do the appraisal, and they can get swamped.

And, if something comes up in the appraisal or inspection, the buyers and sellers might have to renegotiate.

Property guidelines are stricter for an FHA loan, so it's not uncommon for the appraiser to call out certain things that need to be fixed before funding. These can include:

• Dry rot — interior and exterior
• Broken windows
• Exposed wiring
• Exterior doors that don't close right
• Missing appliances
• Old roofs that won't last for three more years

Repairs can add weeks — especially in peak season when contractors are busy. The key is to have realistic expectations and do whatever you can to keep the loan moving along. If the underwriter needs information, an explanation, or documentation — get it to them quickly.