Applying for an FHA loan
Home ownership is a goal that can be tough to reach. 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.
About FHA loans
FHA loans are guaranteed by the Federal Housing Administration, an agency that is part of the Department of Housing and Urban Development (HUD). The FHA doesn't make loans itself, but insures mortgages that meet its fairly generous standards. That protection allows banks and other mortgage lenders to offer loans on more accommodating terms than they could profitably do if they were taking all the risk themselves.
What makes FHA loans attractive? Consider the following:
- Down payments of as little as 3.5 percent
- FHA lenders often allow credit scores as low as 600-620, and some will go below 580.
- Borrowers with weaker credit scores often get better rates than they could on a conventional mortgage backed by Fannie Mae or Freddie Mac.
- If needed, you can borrow additional money for repairs or improvements through the FHA 203(k) loan option as part of your purchase loan.
Before you submit your application for an FHA loan, you should consider some of the downsides as well:
- Fees tend to be higher than on conventional mortgages backed by Fannie Mae and Freddie Mac
- Borrowers who put down less than 10 percent must carry mortgage insurance for the life of the loan, rather than being able to cancel it once they reach 20 percent equity.
Submitting an application for an FHA loan
To apply for an FHA loan, you'll need to gather some essential information about your finances, including:
- W-2 forms for the last two years
- Your last two pay stubs
- 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 submit an application 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 that of the FHA loan you are applying for.
As a general rule, your total debt payments should not exceed 43 percent of gross monthly income, with your mortgage debt not exceeding 31 percent (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 percent in some cases.
Where can you apply for an FHA loan?
Most banks and other mortgage lenders offer FHA loans. However, their lending standards, and the fees and rates they charge, can vary significantly from lender to lender, so it's important to shop around and compare rates and terms that lenders will offer you. One way to do that is by using the from at the top of this page to request free rate quotes from several lenders at once.
Once you choose a lender, there are two ways you can apply for an FHA loan. You can go to the bank itself, obtain the necessary application forms, fill them out either there or at home, then submit them to your loan officer for review.
However, many lenders now allow you to apply for an FHA loan online as well. You log into a special section of the lender's web site 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.