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Homeownership is a goal that can be tough to reach, but FHA loans can make it easier. With low down payments, relaxed credit requirements, and competitive rates, FHA loans are designed to meet the needs of first-time homebuyers and other buyers whose credit or finances might make it difficult to qualify for a conventional mortgage.
Here’s what you should know in order to apply for an FHA loan.
FHA Loan Application Process
1. Meet FHA loan requirements
Before applying for an FHA loan, it’s important to look over the requirements to ensure you qualify. Ideal FHA borrowers should have a credit score of 580 or higher, funds for a 3.5% down payment, a debt-to-income ratio less than 43%, and funds to cover FHA mortgage insurance costs.
Some FHA requirements may vary between lenders or have additional conditions. Make sure to check with the lender’s specific requirements before applying.
2. Find an FHA-approved lender
The FHA doesn’t issue mortgages itself but instead guarantees or insures the loans. They essentially act as a buffer for lenders by reducing the risk if a loan defaults. FHA financing is available from banks, mortgage brokers, credit unions, and online lenders.
FHA lenders can set their own interest rates, so comparing multiple lenders during this stage is important. Find a lender that fits your specific needs; if you have a lower credit score, it may be best to finance with an FHA lender that has a lower credit requirement.
Visit the HUD lender directory to find FHA-approved lenders, or contact a private lender that finances FHA loans.
3. Submit an FHA loan application form
After finding an FHA-approved lender, you’ll need to gather some essential information about your finances. This may include:
- W-2 forms for the last two years
- Pay stubs for the last two months
- Two years of tax returns
- Bank statements
- Statements on investment securities and earnings
- Listing of all debts and minimum monthly payments for each
- Names and addresses of employers over the past two years
- Pension, Social Security, or disability income, if applicable
- If self-employed, two years of profit and loss statements
You do not need to supply information about your credit score; your lender will obtain that directly from the credit reporting agencies.
When you apply for an FHA loan, one of the things lenders will look at is your debt-to-income ratio. This is the percentage of your gross monthly income that goes toward debt payments, including the FHA loan you are applying for.
As a general rule, your total debt payments should not exceed 43% of gross monthly income, with your mortgage debt not exceeding 31% (leaving 12 percent for credit cards, auto loans, etc.) However, these may vary depending on the lender and the borrower – some borrowers may set lower limits for borrowers with low credit scores, while borrowers with excellent credit may be allowed total debt-to-income ratios above 50% in some cases.
4. Compare and choose an offer
Once you submit your FHA application form, it may take about a day or two to receive preapproval letters from lenders. These letters outline the specifics of the loan offer, including the loan amount and the proposed interest rate.
Generally, preapprovals last 60 to 90 days after being issued. During this time, the interest rates and other conditions of the loan may be subject to adjustment, especially if your financial situation changes.
When selecting a loan offer, it’s important to opt for one that suits your personal preferences and fits comfortably within your financial situation. Consider various factors such as the loan’s interest rate, repayment terms, and any associated fees. Also, pay attention to the monthly payments and how they fit into your budget.
Lastly, take into account your long-term financial goals and how this loan might impact them. Choosing an offer that aligns well with your overall financial plan will help ensure a more stable and stress-free financial future.
How Long Does it Take to Apply For an FHA Loan?
Applying for an FHA loan is fairly simple and can be done in minutes. Typically, the timeline from application to closing with an FHA loan is anywhere from 30 to 45 days.
Your loan file will go through underwriting, where the underwriter takes a closer look at your application and reviews supporting documents to ensure you meet the minimum guidelines for FHA financing.
» MORE: See today’s refinance rates
Where Can You Apply For an FHA Loan?
There are two main ways you can apply for an FHA loan. You can go to the bank itself, obtain the necessary application forms, fill them out, and then submit them to your loan officer for review.
Or, you can apply for an FHA loan online. Typically, you log into the application section of the lender’s website where you can complete the necessary forms, scan or otherwise obtain electronic copies of the documentation required, and submit the whole thing electronically.
Your loan officer can then review your FHA loan application and let you know if other information is needed, which you can conveniently submit from home.