FHA loans are one of the most common types of homes loans used today.
They are very attractive to first-time home buyers because of their low credit score and down payment requirements.
If you’re new to the home buying process you are probably wondering how you go about applying for an FHA mortgage.
This article will provide you information on FHA loans and explain in the detail the requirements needed and tips to prepare yourself.
Rate Search: Get Pre-Approved for a Mortgage
What are FHA Loans?
Once upon a time in order to get approved for a mortgage loan you needed excellent credit and a 20% down payment. Not many people were able to qualify so the Government created the Federal Housing Administration.
FHA does not issue loans, they insure the loan in the event a borrower defaults on their payments. This greatly reduces the risk and allows mortgage lenders to loosen their loan requirements.
The FHA will insure a mortgage if a borrower has a 500 credit score and a 10% down payment. However, lenders set their own credit requirements and most lenders do not approve loans to borrowers with a score under 580.
If you have at least a 580 credit scoreyou may qualify for an FHA loan with just 3.5% down.
FHA Loan Requirements
- Property must be appraised by an FHA approved appraiser
- Mortgage insurance premium required regardless of loan-to-value ratio
- Past 2 years of W2’s and tax returns
- 2 years of employment with one employer or in the same industry
- Non-occupying co-signers are allowed
- Property must be used as primary residence
How to Apply for an FHA Loan?
1. Check Your Credit
Before you apply for a loan it’s a good idea to make sure your credit score is up to par before having a lender pull a copy of your credit report.
You can check your credit report and scores for free with many different websites. We recommend Credit Karmaand Credit Sesame. Both allow you to monitor your credit and get update credit scores complete free.
Remember to qualify for an FHA loan you want to have at least a 580 credit score. If you find your score is below a 580 you should work on improving it before applying.
2. Budget for all Costs of Ownership
Buying a house comes with other costs besides just a principle and interest loan payment. You need to budget for mortgage insurance, homeowners insurance, property taxes, and HOA fees.
Most of these extra costs will be included in your monthly payment.
Let’s say you’re buying a $200,000 home with a fixed-rate 30 year mortgage with a 5% rate. Your monthly principle and interest payment will be $1073.64.
FHA MIP (mortgage insurance)will be around $1,500 annually, homeowners insurance $90 a month, and depending on the state you live in property taxes will be between $2,000-$4,000 a year. This pushes that payment to as high as $1,614.
Use our mortgage calculator to see how much house you can afford including PMI and taxes.
Your debt-to-income ratio (DTI ratio) is the amount of monthly debt obligations you have divided by your monthly income.
For example if you make $5,000 per month and you have a car payment, credit cards, student loans, and mortgage payment comes to $1,750 per month then your DTI ratio is 35%.
Most lenders want a DTI ratio of 36% or lower, but FHA loans can allow up to 45% in some cases.
Types of DTI ratios
Up-front debt-to-income- DTI ratio before factoring in a mortgage.
Back-end debt-to-income- DTI ratio after adding your estimated mortgage payment to your debt payments.
3. Have Enough Saved for all Upfront Costs
FHA home loans will finance a loan-to-value ratio of 96.5%, meaning you need to have 3.5% of the purchase price saved for a down payment.
The down payment is not the only upfront costs associated with a mortgage. Closing costsare fees charged by lenders for processing and issuing the loan. These costs can range from 2%-5% of the loan amount.
Closing costs cannot be rolled into the loan because that would cause the total amount financed to exceed the LTV ratio limit. However, the FHA does allow the seller to pay closing costs on behalf of the buyer. In order to get a seller to agree to pay closing costs the purchase price will be increased.
We recommend having at least 10% of the purchase price in savings to ensure you have all upfront costs covered.
4. Get Pre-Approved
Getting pre-approvedfor an FHA loan is actually quite easy. First you need to make sure you work with an FHA-approved lender who offers FHA loans.
Once you have found an FHA lender with you should get pre-approved for an FHA loan before you start housing hunting.
A loan officer will need to pull a copy of your credit report to see if you qualify credit wise and verify your income and assets. Save some time by having the documents ready to go before you call.
What you need to get Pre-Approved
- Last 2 years of tax returns
- Recent paystub and w2
- Drivers License
- Recent bank statement showing the funds for a down payment
If you’re approved, the lender will issue you a pre-approval letter stating the amount you’re approved for.
The Bottom Line…
Applying for an FHA loan is actually quite simple and quick. Make sure you know your credit score so you have an idea if you will qualify for not before having your credit ran.
Use a mortgage calculator to see if you can afford a mortgage and that you have enough money in savings for the down payment and closing costs.
If you’re able to check all of those boxes it’s time to get pre-approved.
Are you looking to apply for an FHA loan?
The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.