Get an FHA Loan

The Federal Housing Administration (FHA) offers special loans to help both low- and moderate-income families purchase housing. All FHA loans are federally backed and all FHA lenders have been approved by the federal government to service the loans. When compared to other types of mortgages, an FHA loan is especially affordable and easy to qualify for, making them a great choice for people and families who have a limited budget or a tarnished credit history.

Steps

How to Apply

  1. Make sure you qualify for an FHA loan. FHA Loans are known for having looser requirements than normal home loans, but they do still have requirements. You must be able to meet most, if not all, of these standards to qualify. If you don't meet one of these standards, you can still potentially be approved for a loan if you can prove extenuating circumstances.[1]
    • You must prove that you have had 2 years of steady employment where your income has remained the same or increased. Your credit score should be 620 or higher with fewer than 2 30-day late payments in the past 2 years. However some lenders can accept a credit score of 580, which is the minimum credit score required by the FHA to insure a loan.
    • You cannot have declared bankruptcy in the past 2 years or had a foreclosure in the past 3 years. If you have, you will likely not qualify for an FHA loan unless your credit has been perfect since.
    • FHA Loans are available only for primary residence occupancy. You have to intend to live in the property you're buying.
    • You must also, of course, have the cash to pay the down payment on your loan (generally 3.5% of the total cost of the loan).
  2. Meet with an FHA-approved lender in your area. Not just any lender can give you an FHA loan. Only certain federally-approved lenders can offer these special loans. To get started, find a lender near you who is authorized to make FHA loans. You can find a lender near you by using the FHA Lender finder available on the United States Department of Housing and Urban Development (HUD) website.[2]
  3. Save money for a down payment. Almost every home loan requires a down payment - a percentage of the loan's total cost paid up front. While FHA loans have especially small down payments, they are no exception. While it varies by location, FHA loans generally allow borrowers to obtain no more than 96.5 percent financing, which means you can expect to pay 3.5 percent of a home's cost up front. There's no way around it - you can't get the loan without making this lump-sum payment. However, if you can also ask a family member to make the payment on your behalf.
  4. Sign up for mortgage insurance. Because you are providing less than 5 percent of the cost of the loan in terms of a down payment, your loan is especially risky to the lender. Therefore, you are required by law to have mortgage insurance to protect the lender. The insurance covers the risk of you not paying back your loan - if you default on your mortgage, your lender won't have to eat the cost. Obtain rates for mortgage insurance in your area - one good place to start is by talking to your lender. Since it's in your lender's interest for you to find good, comprehensive mortgage insurance, they may be able to help.
    • FHA loan requirements state that you can finance (pay as part of your loan) the upfront portion of the mortgage insurance premium. The annual mortgage insurance premium, however, cannot be financed.
  5. Supply necessary documents. To apply for a loan, you'll need to provide the FHA-approved lender with documents that prove your employment status, savings, credit and personal information. The documentation that you'll need is fairly extensive, including job records, tax documents, and personal information. Be prepared with the following when you apply for an FHA loan:[3]
    • Addresses of the locations you've lived in the last two years.
    • The addresses and names of your employers for the last two years, plus the amount of your monthly salary.
    • Valid W2 forms for the past two years.
    • Income tax forms submitted for the past two years.
  6. Complete an FHA loan application. Your FHA-approved lender will be able to provide you with the correct application documents for your loan. Fill the application out as carefully and as factually as you can. If you don't know certain pieces of information, look them up. Don't guess - knowingly lying on federal documents is a crime.
    • You may want to get pre-approved for your FHA loan. This doesn't necessarily guarantee you'll be approved for the loan itself, as, after pre-approval, the lender can still deny you a loan until your property passes inspection.[4] However, this will help you get a good idea of what size of a loan you can afford. Talk to your lender about pre-approval - if your credit history and financial situation are in good order, you're more likely to be pre-approved.
    • Before you fill out the application, you may want to look the document over to ensure you understand all the questions you'll be required to answer. The application is available as a .pdf online.[5]
  7. Have the property appraised. Even if your application is accepted, you can still be denied a loan if the property you wish to buy doesn't pass a proper appraisal and inspection by an FHA-approved appraiser. The appraisal is performed for two reasons:
    • To ensure the property complies with health and safety regulations.
    • To determine the property's value, which also takes into account the value of similar homes in the area.
  8. Complete the FHA loan transaction by signing the closing papers. Be sure to read everything before you sign the final paperwork. Never feel afraid to ask for clarification on anything you don't understand. Once you sign, you're bound to your mortgage - the only way out is either to pay it off completely or to initiate foreclosure, which is not advisable.
    • Closing costs, most of which can be financed, are generally 2 to 3 percent of the purchase price of your new home. Closing costs are miscellaneous fees and expenditures associated with acquiring a home loan, like attorney's fees, the fee for the property appraisal, title examination and insurance, as well as others. Take these into account when you're budgeting for your loan - if you opt to pay up front, you'll need the money for these costs on top of the money for your down payment.
    • Expect to pay a loan origination fee of no more than 1 percent of the value of the loan as well.

Loan Considerations

  1. Know the pros and cons of FHA loans. FHA loans offer a variety of advantages, but they aren't for everyone. Before you try to get an FHA loan, make sure you understand how, specifically, an FHA loan differs from normal loans.
    • Pros: FHA Loans are, as a general rule, cheaper and easier to obtain than average home loans. Your credit history isn't as strictly scrutinized for an FHA loan as it is for other types of loans, so, depending on the specifics of your situation, you may still be able to get a loan if you have a foreclosure or a repossession in your credit history. FHA loans also require a smaller down payment - about 3.5% of the cost of the house, as opposed to the 10-20% most loans require. Finally, FHA loans are "assumable" - if you sell your home, the buyer can assume payments on your loan.
    • Cons: FHA loans require your house to pass a special inspection and appraisal process performed by an FHA-approved appraiser. Also, because FHA loans, don't have the tight standards of normal loans, they require you to pay two kinds of mortgage insurance premiums. These are:[1]
      • Upfront Mortgage Insurance Premium (MIP). Borrowers must pay this premium, which is 1.75% of the home loan, regardless of their credit score. This can be paid as a lump sum or can be rolled into the mortgage payments.
      • Annual MIP. This premium is figured into your monthly mortgage payments. It is based on several criteria: your loan-to-value ratio, the size of your loan, and the timeline for paying off your loan.
  2. Determine whether you can afford monthly FHA mortgage payments. You will need to provide your monthly income to an FHA-approved lender. The lender will also investigate your monthly expenses (student loans, credit card debts, etc.) Lenders won't generally be allowed to give you a loan if the monthly payment on the loan requires too high a percentage of your income.[6]
    • To get approved for an FHA loan, your front-end ratio (monthly mortgage payments plus insurance premiums and property tax) has to be below 31% of your gross monthly income, although, with special justification, you may be able to get approved for a front-end ratio of up to 47%.
    • Your back-end ratio (mortgage plus monthly debt expenditures (car payments, credit card payments, etc.) has to be less than 43% of your gross monthly income. As above, in situations with extenuating circumstances, you may be approved for a back-end ratio of up to 57%.
  3. Seek advice. Still not sure? Don't make a decision about applying for an FHA loan before you completely understand what you're getting into. Talk to a professional - s/he will be able to help you decide whether an FHA loan is appropriate, based on the specifics of your situation. The U.S. Department of Housing and Urban Development (HUD) sponsors housing counseling agencies throughout the country designed to help you make informed decisions about housing, loans, your personal credit, etc.[7] Search for a housing counseling agency near you via the HUD website's housing counselor locator.[8]
    • Alternatively, access the Housing and Urban Development (HUD)'s housing counseling hotline at (800) 569-4287.

Tips

  • You can obtain an FHA loan for the purchase of a multi-family unit, single-family residence, manufactured home, and/or some health-related facilities. Restrictions vary by location, so ask your FHA-approved lender for additional information.

Warnings

  • FHA loans have a maximum purchase price that varies by location. Check with your FHA-approved lender to determine what that price ceiling is. If the purchase price of your new home exceeds the maximum purchase price of the FHA loan, you will be responsible for the difference.
  • To protect yourself from predatory lenders, work with FHA-approved lenders only. You can become a victim of loan fraud by giving your personal information to the wrong people.

Sources and Citations

  1. ↑ 1.0 1.1 http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/comp/premiums/ufmain
  2. ↑ http://www.hud.gov/ll/code/llslcrit.cfm
  3. ↑ http://www.fha.com/hud-fha-04
  4. ↑ http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/glossary
  5. ↑ portal.hud.gov/hudportal/documents/huddoc?id=92001-a.pdf‎
  6. ↑ Ibid.
  7. ↑ http://portal.hud.gov/hudportal/HUD?src=/i_want_to/talk_to_a_housing_counselor
  8. ↑ http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
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