Do you want to use FHA home loans to buy your next house? If so, you probably have a lot of questions about the FHA financing process and what you need to do to be approved in 2024. It is important for perspective house buyers to know what the qualifications are to be approved for an attractive FHA home loan program. The house buyer’s guide below, explains the process to qualify for FHA home loans, so you know what to expect.
Step by Step Guide Walks You Through the FHA Home Loan Process
FHA loans are backed by the Federal Housing Administration. This means that the full faith and credit of the US government backs every loan approved by FHA. This assistance entails that in case the borrower defaults on the loan, the FHA will reimburse the lender. As a result, numerous lenders approved by the FHA can provide attractive credit terms and down payment conditions to individuals who might not meet the standard mortgage requirements. FHA loans can receive approval even with a credit score as low as 580, coupled with a 3.5% down payment. Additionally, they offer substantial flexibility in terms of debt-to-income ratios and income prerequisites. The FHA mortgage is one of the easiest to be approved for in America today. But depending upon your circumstances, the approval and closing process can take up to a few months.
In most loan situations, the FHA loan approval process includes the steps below.
This is an elective yet advisable step. Pre-approval entails your lender assessing your financial circumstances and determining your eligibility for a loan, as well as the amount they can offer you. It’s referred to as “pre-approval” because it occurs before you commence your house-hunting journey and before the loan is officially sanctioned. During this phase, you generally need to submit your W-2s, pay stubs, self-employment profit and loss statement, tax returns for the last two years, and bank statements. Additional information might be necessary during the underwriting process. Pre-approval is crucial because it demonstrates to the seller that you have received mortgage approval. Most sellers prefer dealing with individuals who have already secured mortgage approval, and the same holds true for seller’s agents. They are more likely to take your offer to purchase the home seriously when backed by a pre-approval letter. Following your pre-approval by the FHA lender, you can begin searching for a home within the approved price range.
Complete FHA Application
In the United States, every individual applying for a mortgage loan is required to complete the Uniform Residential Loan Application. Typically, this step occurs after pre-approval and once you’ve identified a house you wish to purchase. The application solicits details about the desired loan type, property address, and comprehensive financial and credit particulars. While the lender may opt to have you initiate the application earlier in the process, potentially during the pre-approval stage, it’s a time-consuming endeavor. The form will request information about your employment history, spanning several years, as well as your residential history over the same duration. It also asks about income sources, housing expenses, debts, etc. There is no way around this process if you want an FHA home loan. Complete the FHA application honestly and to the best of your knowledge.
The lender must ascertain the precise market value of the home you intend to purchase. While your loan is undergoing the underwriting process, the lender will arrange for a home appraisal. A licensed appraiser will visit the property to conduct a thorough assessment, estimating its current market value within your geographic area. This estimate is grounded in recent sales prices of comparable homes in the vicinity. The appraiser also evaluates the property’s features and condition, combining these factors to determine an accurate valuation.
The lender wants to know what the possible resale value of the home is if they have to foreclose and resell it. They want to know they can sell it for as least as much as they are loaning you. If the home appraises for at least as much as the loan amount, you are fine. If it appraises for less, then you have a problem. You might have to ask the seller to lower the price, or you could have to come up with cash to close the deal. Note that there are limits on the size of the FHA loan you can get around the country. The ceiling on FHA loans currently is $636,150.
The lender’s underwriter will analyze all of your financial paperwork, credit score, income and debts to determine if they can make the loan. Usually, the underwriter will ask for clarification on some issue; for example, they might want a letter of explanation about a foreclosure you had four years ago. This would involve you writing a letter of explanation for the file. Generally, these questions and clarifications are a normal part of the process, so don’t worry. If the underwriter finds any serious issues, then it is possible the loan could be declined. But for an FHA loan, getting approved is fairly easy. You can get a loan with a 580 credit score and only put down 3.5%. Debt to income ratio requirements are also very forgiving.
FHA Home Loan Approval
After the underwriter thinks you have met the guidelines for the loan, as well as FHA guidelines, you will get a closing date. This means you can go ahead and set up a date to finalize the loan, sign the paperwork and have the loan funded. Then, the house is all yours. Below are some of the most important reasons to check your credit before you apply for your mortgage:
Below are some helpful financial resources that can assist you as you are getting your credit to buy a home:
6 Simple Steps to Qualify for an FHA Loan
For people who want to buy a home in 2024 but lack the credit or big down payment, don’t worry. The FHA loan program is one of the easiest to qualify for. Low down payments and credit score flexibility make it easier for millions of people to buy a home today. This article will give you all the steps and vital things to know about these very useful home loans.
FHA home loans are housing loans supported by the Federal Housing Administration. Borrowers are required to cover monthly mortgage insurance costs, typically around 0.85% of the loan amount annually. However, this extra monthly expense enables quicker access to a home loan, even for those with lower credit scores, often requiring just a 3.5% down payment. In many instances, FHA home mortgages provide more favorable interest rates than conventional loans. This means that even if your credit score is less than stellar, you can secure a highly competitive rate.
Other benefits of an FHA loan
- Higher debt to income ratios are allowed.
- The loan can be assumed: If you sell the home and it is in a higher interest rate market, someone who wants an FHA loan can assume the loan at the lower rate, if they qualify for this low down payment mortgage.
- Seller can pay up to 6% of your closing costs. It is possible to have an FHA loan with very little out of pocket.
- Co-borrowers who do not live in the home can sign onto the mortgage.
To qualify for an FHA loan, here are the steps you need to follow:
Get Your Credit in Shape
FHA loans do not require a really top credit score to qualify, but you will need to have acceptable credit. The absolute minimum score today is 500, but most lenders will require at least a 580-credit score. If you have a score lower than that, your first piece of homework is to get that score in better shape. Part of doing this involves getting a copy of your credit report and seeing exactly where you stand. If there are any errors on the credit report, get them fixed by contacting the credit bureaus and filing a dispute. FHA mortgages do not require great credit, but the lender wants to see you are financially stable. You should not have any late credit payments in the year before you apply for a loan.
Gather Your Income Documentation Together
Gone are the days when you could secure a home loan simply by verbally stating your annual income to the lender. Nowadays, providing concrete proof of your earnings is essential, necessitating the submission of W-2s, tax returns, bank statements, and pay stubs. This rigorous documentation is mandated by the federal government, ensuring that borrowers’ income is thoroughly verified. Thus, it’s vital to organize your financial records in advance of your loan application. Furthermore, having a steady and sufficient income is paramount for loan eligibility. Lenders will scrutinize your earnings and employment history to confirm your financial stability. Therefore, it’s not an opportune time to consider switching or leaving your job abruptly.
Save Up for a Down-Payment
You do not need a huge down payment to get an FHA loan, but you will need 3.5% at least. For a $200,000 loan, this is $7500. You also will need to have money for closing costs that total 3-5% of the loan amount. But if you are struggling to come up with that money, you can get a gift from a relative for the entire down payment amount. In this sense, it is possible to have a 100% financing loan with FHA.
Consider the Term of Loan and Whether You Want a Fixed or Adjustable Rate
FHA loans can be fixed or adjustable, and are available in 15 or 30 year variations. Most people get a 30 year fixed rate; this option has been very popular in 2023 and 2024 as FHA rates have continued to be very low. It is unlikely that rates will drop further and will probably increase, so a 30 year fixed loan could be the way to go.
Does the Home Need Repairs?
Another plus of FHA loans – you can get additional money to make renovations. The 203k loan program allows you to buy a home and get up to $35,000 to make repairs. These funds are offered at very low interest rate similar or identical to your FHA mortgage. Unless you can pay for your repairs in cash, this is some of the cheapest money you will ever get for renovations!
Get Pre-Approved for a FHA Mortgage
After meticulously assembling all your financial documents and gaining insight into your credit score, the next prudent step is to seek pre-approval from a lender. This pre-approval letter serves a dual purpose. Firstly, it grants you the liberty to explore prospective homes, signifying to sellers that you are a bona fide and committed buyer. Secondly, and just as crucial, it provides clarity regarding the extent of your home-buying capacity. Engaging in the pursuit of a new home without pre-approval is often a futile exercise. Most sellers are disinclined to entertain potential buyers who cannot substantiate their financial readiness. By adhering to the aforementioned steps, you can swiftly secure approval for an FHA loan, facilitating a seamless and efficient home-buying process.
What Does FHA Stand for?
FHA stands for the Federal Housing Administration, an institution established in 1934 during the Great Depression. Its primary objective was to enhance accessibility to home financing for individuals aspiring to own homes, particularly those encountering challenges in obtaining affordable mortgage rates. Over the years, the FHA has emerged as a crucial resource, extending its support to countless homebuyers in their quest to secure affordable home loans.
2024 Credit Score Requirements for FHA Home Loans
FHA loans are a good deal for many of us with lower credit score. As of 2023, the Federal Housing Administration dropped the minimum credit score requirement for FHA loans to 500. In comparison, the minimum credit score for a conventional loan is 620 and 640 for USDA loans. While it is getting easier for people to get FHA loans, having a 500-credit score can make things difficult. 2023 statistics show that you are better off with a higher credit score to get approved for an FHA home loan. Below are the details.
FHA Home Loan Credit Requirement Overview
What are the requirements for an FHA mortgage in 2024? FHA approved lenders now will approve more than 96% of people who have a FICO score of 580. If your score is at least that high, you may qualify for a 3.5% down payment as well. This is one of the most lenient down payment requirements on the market. Plus, underwriting standards are very forgiving in terms of credit score and debt to income ratios.
If you have a 500-credit score, that is the minimum score that will be considered per FHA requirements. But know that you will have to put down 10% to get a loan at that FICO score. Only 2% of FHA loans in the past year have gone to people with 500 to 549 credit scores. Your best chance for approval with this low of a credit score is to show a clean payment history for the past 180 days and a good sized down payment.
There are many reasons you could have a lower credit score and still qualify for an FHA loan:
- You are using a lot of your available credit. This can lower your score by 50 points in some cases. But as you pay it off, your score will rise.
- You have a lot of credit accounts, or a lot of new credit accounts
- Your credit history is limited
- You had a foreclosure or bankruptcy in the past
FHA guidelines state that if you have made timely payments on your credit obligations in the recent past, you are a reduced risk. So, if you have a bankruptcy on your credit report from two years ago with sub 600 credit, this will not prevent you from getting an FHA loan. On the other hand, if your credit report shows you have enough income to support your bills but have a lot of late payments, you are less likely to be approved, even if your score is higher. FHA and its approved lenders care the most about a steady payment history on your obligations in the past 12 to 24 months. This indicates a degree of financial stability that reduces lender exposure.
Getting a Home Loan from FHA With No FICO Score
Surprisingly, having a limited credit history does not necessarily disqualify you from obtaining an FHA home mortgage. Even if you’ve managed your finances with cash transactions and haven’t utilized credit cards or car loans, the FHA’s guidelines indicate that lenders should not automatically decline applicants with no traditional credit history. Instead, lenders are encouraged to assess payment records associated with non-traditional credit sources, like cell phone bills, rent payments, utility bills, and insurance premiums, to evaluate your creditworthiness. In certain instances, the FHA might even approve your application based on these non-traditional credit references. Learn more about no credit home loans.
FHA Loans After a Chapter 7 Bankruptcy
Many individuals hold the misconception that securing a mortgage after a bankruptcy necessitates an extended waiting period of seven to ten years. However, this notion is far from accurate. In the wake of the housing market crash, a significant number of people were compelled to file for bankruptcy. Restricting loans for those who’ve experienced bankruptcy in the past few years would have detrimental consequences for the housing market. Fortunately, FHA loan eligibility standards are more reasonable. Following a Chapter 7 bankruptcy, you can qualify for an FHA loan after a mere two years, and with a Chapter 13 bankruptcy, it’s just 12 months. The pivotal factor is demonstrating a consistent payment history over the past 12 to 24 months to satisfy the FHA and its affiliated lenders. In this context, a prior bankruptcy will not pose an insurmountable obstacle. Similarly, FHA home loans remain a viable option after a foreclosure. As the aftermath of the mortgage crisis witnessed more foreclosures than bankruptcies, the FHA guidelines mandate a three-year waiting period for most applicants. However, it’s essential to note that specific lenders may offer more lenient terms, so it’s advisable to explore various lending options.
FHA Home Loans and 3.5% Down Payments
A major benefit of the FHA program is the 3.5% down payment option for people with a 580 credit score or higher. While it is technically possible to get a loan with a 500 score, it is unlikely, and you need 10% down. As you are working towards getting an FHA loan, it is advised to get your score as far above 600 as you can. Once you get into the 620’s, most FHA approved lenders will work with you and approve your loan. FHA mortgages are perfect for people with past credit problems BUT are current on their monthly obligations in the recent past. With a 580 credit score, you may be able to get a home loan with only 3.5% down.
Rules on Financing Closing Costs and Lending Fees on FHA Home Loans
Closing costs and lending fees have been steadily rising in recent years. New mortgage loan regulations and financial safeguards mean lenders have higher costs, and many of those are passed on to borrowers. According to Bankrate.com, mortgage closing costs increased 1.5% from 2021 to 2022 on average.
This situation can pose challenges for individuals with limited funds when it comes to completing their loan. Closing costs, which may total 3-5% of the loan amount, can be a substantial financial burden. If you’re obtaining an FHA home loan and find yourself concerned about these closing costs and associated lending fees, several approaches can be considered. One alternative is to finance a portion of the closing costs, and there are additional strategies available to address these expenses. Below, you’ll find further insights into how you can manage and finance both closing costs and other financial obligations associated with FHA loans.
Overview of FHA Financing Closing Costs
Part of the FHA closing costs can be financed as long as you meet LTV maximum guidelines. What this means is the loan plus closing costs do not exceed 96.5% of the fair market value or selling price of the home, whichever is less. In this case, you can roll some of the closing costs into your loan.
To finance the closing costs, you should talk with your FHA-approved lender. Financing options on closing costs depend upon your income, credit history, employment and related factors. For example, if you have a lower income and are barely qualifying for the loan, rolling closing costs into the loan could make you ineligible for the loan. Your mortgage broker will be able to look at your specific financials and determine how much of the closing costs you can finance. The Federal Housing Administration only allows you to roll closing costs into the loan if you qualify for the higher loan amount.
Another option with some lenders is to take a slightly higher interest rate in exchange for the lender paying at least some of the closing costs. They might do this by giving you a lender credit at closing and increasing your rate by .5%. FHA also allows the seller to pay part of your closing costs. This does not always happen, but some sellers may need to move the property ASAP and may agree to do so.
What to Do If You Cannot Qualify for Financing Closing Costs
Lenders vary in their policies, and certain lenders may assess your financial circumstances and determine that financing closing costs is not permissible. There are also instances where FHA may decline a request for financing closing costs. In such situations, you might explore the option of obtaining a small line of credit from a national bank or credit union, which can be utilized to cover the closing costs. Alternatively, some individuals opt to approach close family members for assistance with covering the closing costs, agreeing to repay them with interest over a span of several years.
What Is Included in FHA Home Loan Closing Costs?
You can expect to pay for the following closing costs on FHA mortgages. A percentage of these closing costs can be rolled into or financed into the loan:
- Loan origination fee: Percentage of the amount of the loan that the lender charges you
- Discount points to lower rate: 1-point equals 1 percent of the loan amount
- Appraisal fee: What you have to pay to have the home appraised
- Credit report: Charge to pull your credit report
- Tax service: Lender hires a company to ensure there are no liens or taxes owed
- Title insurance: Covers any legal damages if the seller cannot transfer the title legally. This protects the mortgage lender and borrower.
- Attorney fees: What the attorney charges for overseeing the transaction at the title company
- Document fees: FHA lender will charge you to have the many documents ready for closing
- Property taxes: You are charged the remaining yearly property taxes on the home
- Home inspection: Covers cost of having the home inspected
- Survey: The fee to get accurate boundary and property measurements by the surveyor
The bottom line is that in some cases, you can reduce your out of pocket expenses when you buy the home by having your closing costs financed or otherwise paid for. Check with your lender to see what options you have.
Gift Rules for Down-Payment Sources Guidelines on FHA Mortgage Programs
Securing a down payment has historically posed a significant challenge for many aspiring homebuyers in the United States. Back in the day, a substantial 20% down payment coupled with a stellar credit score was the norm for home purchases. However, the landscape has evolved in 2023, opening doors for those with credit scores ranging from average to below average, and offering opportunities for homeownership with a modest down payment in certain scenarios. The FHA loan program stands out as a preferred choice for such prospective buyers. The FHA mortgage loan extends a substantial advantage, permitting approval with a mere 3.5% down payment for individuals boasting a credit score of 580 or higher. Should your credit score fall below that threshold, a 10% down payment is the requirement.
Yet, there are instances where prospective borrowers may encounter difficulties when trying to amass the necessary down payment for their home loan. In such situations, the FHA guidelines provide for alternative options. Let’s delve into these alternatives for a better understanding.
FHA Down Payments and Approved Sources
As previously highlighted, securing an FHA home mortgage approval necessitates a minimum down payment of 3.5%, and this sum must be verified by the FHA-approved lender to ensure it originates from a source that the FHA deems acceptable. But what exactly constitutes an “approved source”? Typically, prospective homebuyers fund their down payments from sources such as personal cash reserves, investments, or by borrowing from their 401k or IRA. The underlying principle behind source verification is to ascertain that the borrower did not acquire the down payment funds through methods like credit card advances or payday loans, which are considered less favorable.
However, there are additional avenues for procuring the necessary down payment. One such method is receiving it as a gift. While this gift option comes with its own set of FHA-mandated requirements for both the gift itself and the donor, its flexibility allows individuals to potentially access an FHA loan with, in theory, zero initial investment. To determine the eligibility of a down payment gift, a review of the rules outlined by the Department of Housing and Urban Development (HUD) is imperative.
According to HUD 41.55.1 Chapter 5 Section B, for the funds to be a gift, there cannot be any expected repayment of the money.
Also, FHA will scrutinize the giver of the gift. Chapter 5 of the HUD Code states the cash gift is ok if it comes from your relative; employer or labor union; close friend with a defined interest in you; charitable organization; government agency or public entity.
FHA also states who cannot give gift funds to you for the down payment. These are the seller; the real estate agent or broker on the deal; the builder or an associated entity.
The down payment gift cannot be structured as a loan with an obligation for repayment at a later date. A crucial requirement is to obtain a formal gift letter from the individual or organization providing the funds. This letter should unequivocally affirm that the recipient is under no obligation to return the money. Moreover, it must include essential contact information for the donor, encompassing their name, address, and telephone number, along with details of the originating bank account that will facilitate the fund transfer.
In support of this arrangement, the gift donor should be prepared to supply a bank statement alongside the gift letter. Ensuring that the transferred amount aligns precisely with the figures outlined in the gift letter and matches the deposit made into the recipient’s account is of paramount importance.
These specific FHA loan rules are meticulously defined to uphold the principles of fairness and equity in the home buying process facilitated by the FHA. However, when borrowers diligently adhere to these FHA stipulations, they can indeed receive financial assistance for their down payment from a friend or relative. Find lenders that offer zero-down home loans.
Don’t Have Friends or Family Who Can Help?
Not every borrower has friends or family who can give them a gift for their down payment. But HUD lists many government programs spread throughout the country in most states that can offer down payment and closing cost help for certain borrowers.
It also is worth checking if your employer and state have employer assisted housing. This program can help people with moderate incomes to get a loan to cover closing costs and down payment. Look up EAH in your state on Google to see what is available.
Experts say that down payment help is available for nearly 90% of homes in the US. There is a good chance that you can get help on your down payment through one of these organizations. References: https://www.fha.com/fha_article?id=441
How to Shop FHA Mortgage Rates Today Efficiently
As we entered September 2023, there were notable shifts in the landscape of FHA mortgage rates. The early days of the year saw rates remaining below the 4% threshold, a trend that had persisted for nearly half a year. However, within a mere fortnight into the new year, the FHA interest rates on 30-year mortgages embarked on an upward trajectory, a trend that has continued in subsequent weeks. Nonetheless, prospective borrowers scouting for FHA financing may still find themselves securing FHA loan rates in the favorable low 4% range throughout the year.
For individuals whose credit profiles fall short of the requirements for conventional loans, FHA loans remain the preferred choice. Even if your credit score hovers in the lower 600s, an FHA loan might offer you a more competitive rate than its conventional counterpart. As interest rates gradually ascend, potentially reaching and exceeding the 6.3% to 6.5% range and beyond, given the improving economic climate, the FHA loan proves invaluable in securing an advantageous deal. It’s important to bear in mind that FHA loans do come with mortgage insurance expenses, which tend to be higher than those associated with conventional loans. Nevertheless, the reduced interest rate often helps offset a portion of these costs.
When projecting FHA rates for 2024, the consensus among experts leans toward rates settling in the mid-7% range by year’s end. Nevertheless, it’s worth noting that historical trends indicate that rates for both conventional and FHA mortgages remain exceptionally low considering the prevailing market conditions. With this in mind, if you’re contemplating the prospect of obtaining an FHA loan, the present moment presents an opportune window for favorable terms.
Below is more information about how to shop for an FHA loan these days.
Look at a Lot of FHA Lenders with Experience Approving Lower Credit Scores
Securing an FHA home loan proves to be a more streamlined process when compared to the conventional loan application. This ease of access stems from the fact that FHA loans carry the backing of the U.S. government, empowering lenders to offer borrowers more favorable terms than they might initially anticipate. The FHA guidelines dictate a minimum credit score of 500 as the threshold for obtaining an FHA loan. However, if your credit score falls below the 600 mark, it’s prudent to initiate your search for an FHA mortgage rate by reaching out to multiple lenders.
The rationale behind this approach lies in the presence of what are known as overlays, which are unique to FHA-approved lenders. These overlays essentially provide lenders with the discretion to establish credit score requirements that surpass the FHA’s mandated minimum of 500. For some lenders, the baseline may be set at 600, 620, or even 640. Consequently, as your credit score descends lower, the necessity to expand your search among various lenders becomes increasingly apparent.
This meticulous exploration may yield a situation where two lenders offer strikingly similar programs, yet one extends a rate that surpasses the other by a noteworthy 0.5%. As such, diversifying your options and conducting thorough research can significantly benefit your prospects of securing an FHA loan with the most advantageous terms available.
Remember to Account for Mortgage Insurance
FHA loans offer various advantages across different scenarios, but it’s essential to be aware that they come with the cost of pricier mortgage insurance in exchange for the favorable FHA interest rates they offer. The mortgage insurance associated with FHA loans comprises two components. The initial component is an upfront premium, which amounts to 1.75% of the loan’s total value. In practical terms, this equates to $1,750 for a loan worth $100,000. The upfront premium does provide the flexibility to be rolled into the mortgage amount, thereby lessening the immediate financial burden.
The second component is the annual premium, necessitating monthly payments. The precise amount of this premium varies, contingent upon factors such as the loan’s duration and the loan-to-value ratio (LTV). For a 30-year FHA loan, particularly if the down payment is less than 5%, the annual insurance premium typically stands at around 0.85% of the loan amount. These premiums, while they may entail an added cost, serve to provide borrowers with the benefits of an FHA loan, including competitive FHA loan rates that cater to diverse financial needs.
Senior Borrowers Should Consider a HECM
If you are 62 years or older, you should consider the home equity conversion mortgage that is backed by the FHA. The HECM is a special type of reverse mortgage that enables senior citizens to tap their equity effectively.
The Lender Must Be Approved to Issue FHA Loans
Know that FHA does not lend money; it merely insures the loan issued by a lender. So borrowers need to get an FHA mortgage through a lender approved by the agency. Not all lenders offer the same rates. Some have investors who want more security and charge a higher rate, while others are willing to offer a lower rate.
Remember to Lock in Your Loan Rate Early
As we noted earlier, it appears that FHA rates generally are on the way up in 2024. FHA loan rates have stayed abnormally low despite the Fed raising the Prime Rate several times in the past 18 months. Rates have edged up in the last few months, but overall FHA interest rates remain attractive and competitively priced. It seems likely this trend will persist. If you plan to close a loan in the next few months, it is smart to lock the rate for as long as you can. Even paying to lock it beyond two months is not out of the question. FHA rates are only going to go up this year as the economy gets even better than it is now.
FHA home loans are great products that provide you with a lower than market rate even with average credit. You do have to pay a higher cost for mortgage insurance, but this cost is somewhat offset with the low rate. This means you really should be watching FHA mortgage rates like a hawk if you plan to close soon. This probably is not a market to let the rate float and hope for lower rates. Time is running out on the artificially low rate environment for all loans – FHA, conventional and others.