Apply for an FHA Loan in Four Steps, How to Get an FHA Loan
What You'll Learn: What qualifies buyers for an FHA loan and what you’ll need to apply for one.
EXPECTED READ TIME: 8 MINUTES
Applying for an FHA mortgage is just like obtaining any other loan. You apply and turn in your documentation. If everything looks good, you get a pre-qualification letter. Then you start shopping.
Generally, an FHA loan is easier to get as far as borrower qualifications. But property requirements are stricter. Let's walk through everything you need to know on how to apply for an FHA loan.
How to get an FHA loan…
Step One: Check if you qualify
Here is a list of the qualifying factors borrowers must meet to be approved:
- According to the FHA, a Borrower is not eligible for FHA-insured financing if the Minimum Decision Credit Score (MDCS) is less than 500. However, that doesn't mean that an approved FHA lender would accept a score of 500. Aside from following the FHA guidelines, every approved lender has its own requirements. These additional requirements are called "overlays." Most lenders have an overlay that the minimum credit score they'll accept is 620.
- There are two qualifying ratios an FHA underwriter considers:
First: The ratio of the mortgage payment to gross income (before taxes). That ratio cannot exceed 46%. Mortgage payment includes principal and interest, property taxes, homeowners’ insurance, mortgage insurance, homeowner association dues, and any special assessments.
Second: The other important factor is the debt-to-income (DTI) ratio. Your DTI can't exceed 56% and includes your housing costs and recurring bills like credit cards and car loans.
- 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.
- 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.
- 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.
Step Two: Organize your documents
Several documents will be required to verify the information you provide on your application. Being prepared and organized prior to applying for your FHA loan will ensure the process goes smoothly. Below are the documents you will need. Although, the lender may require other documentation before final loan approval and closing.
- Bank statements (30 days)
- Pay stubs (30 days +)
- Previous two years of W2 tax forms; for self-employed borrowers Schedule K-1 (Form 1065)
- Income tax returns (including all schedules and attachments), two 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)
Step Three: Research the types of FHA loans and the lenders who provide them
Not every lender offers every type of FHA, so it’s important to research which lenders will be able to provide the best option for you. Here is a list of the five most typically used FHA loans:
- Traditional Mortgage: for financing a primary residence from single-family up to fourplex.
- Home Equity Conversion Mortgage: allows homeowners age 62+ to exchange their home equity for cash.
- 203(k) Mortgage Program: a mortgage with extra funds to cover repair costs, renovations, and home improvements.
- Energy Efficient Mortgage Program: a mortgage with funds for energy-efficient home improvements.
- Section 245(a) Loan: a Graduated Payment Mortgage (GPM) with low initial monthly payment increasing over time, the monthly principal payment increases are meant to shorten the loan term.
The FHA website has a complete list of their single family mortgage programs.
Step Four: Apply
Once you’ve checked that you qualify, have your documents organized, and done your research it’s time to apply for your FHA loan. The time it takes to receive preapproval differs from lender to lender. However, it’s important to note that the average timeline between application to closing is 30 to 45 days.
Questions you should ask your lender
Like any other mortgage application, there’s a lot to consider when you’re applying for an FHA loan. Questions and concerns are a normal part of the process, so don’t be afraid to bring them to the attention of your loan officer. Here are a few you might already be wondering about and their answers:
- Are FHA loans good?
FHA loans are great for anyone who wants a home and meets the FHA loan qualifications. FHA mortgages are a favorite of first-time homebuyers, but not exclusive to them.
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’s called MIP, which stands for mortgage insurance premium. MIP works a bit differently from PMI. With MIP, it depends on the down payment. For a down payment 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 up-front MIP (UFMIP) is paid at the closing and an annual MIP is calculated every year and paid over 12 months.
- 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 low, lenders get backed up. The turnaround on loan processing and underwriting can take longer. Plus, only FHA appraisers can do the appraisal, and they can get swamped. Typically for FHA, a 45-day closing date is a good starting point.
Property guidelines are also stricter for an FHA loan, so if something comes up in the appraisal or inspection, the buyers and sellers might have to renegotiate. 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.
At the end of the day …
Before applying, make sure you meet the minimum requirements and have all of the needed paperwork ready to submit. Don’t be afraid to speak 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.