Do you want to use an FHA mortgage to buy your next home? If so, you probably have a lot of questions about the FHA home loan process and what you need to do to be approved in 2020. It is important for perspective house buyers to know what the qualifications are to be approved for an FHA loan. The home buyer’s guide below, explains the process to qualify for FHA 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 support means that if the borrower does not pay the loan, the FHA will pay back the lender. This allows many FHA-approved lenders to offer favorable credit and down payment terms to people who would not otherwise qualify for the mortgage. FHA loans can be approved with a 580-credit score with a 3.5% down payment, and also feature very flexible debt to income ratios and income requirements. 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 optional step but recommended. Pre-approval is when your lender reviews your financial situation and checks if you can get a loan, and also how much they can lend you. It is called a pre-approval because it is completed before you start to look for a house and before the loan is officially approved. At this stage, you generally need to provide your W-2s, pay stubs, self-employment profit and loss statement, tax returns for last two years, and bank statements. You could need to provide more information on any of these during the underwriting process. Pre-approval is important because it show the seller that you have been approved for a mortgage. Most sellers only want to talk to people who have been approved for a mortgage, and the same goes for sellers’ agents. They will take an offer from you to buy the home more seriously with a pre-approval letter. After you have been pre-approved by the FHA lender, you then can start to shop for a home that meets the approved price range.
Complete Mortgage Application
Everyone who gets a mortgage loan in the US then needs to fill out the Uniform Residential Loan Application. This usually will happen after pre-approval and after you have found a house that you like and want to buy it. The application asks for the type of loan you want and the property address, as well as all of your financial and credit information. The lender could have you complete your application earlier in the process, such as during the pre-approval process. The loan application takes a while to complete; it will ask for information about where you work and have worked for the last several years, as well as where you have lived for the last several years. It also asks about income sources, housing expenses, debts, etc. There is no way around this process if you want an FHA loan. Complete the application honestly and to the best of your knowledge.
The lender needs to know the true market value of the home you want to buy. While the loan is in the underwriting process, the lender will order a home appraisal. The licensed appraiser will come to the home and evaluate it and estimate what it is worth in the current market for your area. The appraiser bases his estimate on what other homes in the area have sold for recently. He also will review the features and condition of your home to arrive at a number.
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 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 FHA Loan
For people who want to buy a home in 2018 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 loans are home loans that are backed by the Federal Housing Administration. Borrowers must pay for mortgage insurance each month that totals .85% or so of the loan each year. But this additional monthly cost means you can get a home loan faster than you otherwise would with a low credit score, and with only 3.5% down in many cases. FHA loans offer a lower rate than a conventional loan. Even if you have a below average credit score, you can get a super low 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 the loan.
- 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 loans 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
You no longer can qualify for a home loan just by telling the lender what you earn each year. You also have to prove your income with W-2s, bank statements, tax returns and pay stubs. This is because the federal government now requires lenders to fully document the income of borrowers. This means you need to have your financial documents together before you apply for a loan. You also should have sufficient income to qualify for a loan. The lender will want to verify your income and ensure that you have been steadily employed in the recent past. This is not a time to be switching or quitting jobs!
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 2017 and 2018 as 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
Once you have all financial documents together and have an idea of your credit score, you should get pre-approved with a lender. With a pre-approval letter, you will be able to look at houses and the seller will know you are a serious buyer. Having a pre-approval letter also is important because it lets you know how much home you can afford. There is little point to shop for home if you have not been pre-approved; most sellers will not want to bother with someone who cannot prove they are able to buy. If you follow the above steps, you will be able to get approved for an FHA loan fast.
What Does FHA Stand for?
FHA is an acronym for Federal Housing Administration. It was founded in 1934 during the Great Depression in an effort to provide better access to home financing for everyday people that wanted to become homeowners but had difficult securing financing at an affordable mortgage rate. Since then, FHA has been a beacon of hope for millions of home buyers looking to buy a home with an affordable FHA loan.
2018 Credit Score Requirements for FHA Loans
FHA loans are a good deal for many of us with lower credit score. As of 2016, 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. 2018 statistics show that you are better off with a higher credit score to get approved for an FHA loan. Below are the details.
FHA Loan Credit Requirement Overview
What are the requirements for an FHA mortgage in 2018? 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 Loan from FHA With No FICO Score
You might not think so, but you can get a loan from FHA even with minimal credit history. For instance, you may pay for everything in cash and have no credit cards or car loans. FHA states that lenders may not reject an applicant out of hand with no credit. Instead, the lender should gather payment history for accounts similar to credit accounts, such as cell phone bills, rent payments, utility payments and insurance payments. In some cases, FHA may be able to approve your application if you only have non-traditional credit sources.
FHA Loans After a Chapter 7 Bankruptcy
So many people think you cannot get a mortgage after a bankruptcy for seven or 10 years. This is complete nonsense. After the mortgage crash, millions of people declared bankruptcy. If lenders would not approve loans for people with a bankruptcy in the past few years, the housing market would suffer. The standard for being approved for an FHA loan after a Chapter 7 bankruptcy is two years, and 12 months with a Chapter 13. Remember, you mainly need to show FHA and its lenders that you have a solid payment history for the past 12 to 24 months. In this case, a bankruptcy will not stop you. Similarly, FHA home loans are possible after a foreclosure. Even more people had foreclosures after the mortgage meltdown than had bankruptcies. For FHA mortgages, the wait generally is three years, but specific lenders may have more lenient standards. Ask around.
FHA 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 loans 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 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 1.6% from 2015 to 2016 on average.
This can make it harder for some people short on cash to finalize their loan. Closing costs can amount to 3-5% of the loan amount. What should you do if you are getting an FHA loan and are worried about closing costs and lending fees? One option is to finance part of the closing costs, and there are other options as well to deal with those costs. Below is more information about how to finance closing costs and other costs on FHA loans.
Overview of 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
Every lender is different, and some may look at your financial situation and not allow you to finance closing costs. Or, FHA may outright deny financing your closing costs. In this case, you may look for a small line of credit at a national bank or credit union that you can use to pay the closing costs. Other people sometimes ask close family to help them with closing costs and pay them back with interest over a few years.
What Is Included in FHA 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
One of the biggest obstacles to buying a home for Americans is the down payment. There was a time when you needed a 20% down payment and a high credit score to buy a home. But in 2018, you can buy a home with average to below average credit and a low down payment in some cases. One of the most popular loan programs for these buyers if the FHA loan. A major advantage of the FHA mortgage loan is you can get approved with only a 3.5% down payment with a 580 or higher credit score. If you have a lower score than that, you need a 10% down payment.
Still, there are situations where the borrower is having trouble coming up with the down payment for the loan. What to do then? FHA guidelines do allow other options. Keep reading to learn more.
FHA Down Payments and Approved Sources
As we note above, you are required to have at least a 3.5% down payment to be approved for an FHA loan. The money must be verified by the FHA-approved lender to come from an ‘approved source.’ What is an approved source, anyway? Most people get their down payment from cash reserves, investments, borrow from 401k or IRA, etc. The idea behind verifying where the money came from is to make sure the borrower did not get the down payment from a credit card or payday loan, etc.
But there are other options for your down payment. The funds also can come from a gift. The gift and the giver do need to meet FHA requirements, but this flexible guideline makes it possible to get into an FHA loan with, technically, zero money down. To determine if the down payment gift can be used or not, it is necessary to check HUD rules. 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 gift for your down payment cannot be made based upon paying it back later. You are required to get a gift letter from the person or organization. The letter should state that you are not required to pay the money back. It also should provide the contact information for the borrower, such as name, address, and phone number. Also included should be the bank account from which the funds will be sent.
The gift donor should be OK with giving a bank statement with the letter. Also, he or she should ensure that the transfer amount matches what is in the gift letter and what is deposited into your account.
FHA rules are very specific on these areas to ensure that the home buying process through FHA is fair and just. But as long as you follow the FHA rules, you should be able to get help with your down payment from a friend or relative.
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
In February 2018, things have changed a bit with FHA mortgage rates. At the beginning of 2018, rates had stayed under 4% for almost six months. But within two weeks of the new year, the rate for 30-year mortgages had increased to 4.15% and have gone higher since. But the good news is that mortgage rate shoppers for FHA loans still may be able to get a rate in the low 4s this year.
FHA loans will continue to be the best bet for people who do not have good enough credit for conventional loans. Even if you have a credit score in the low 600’s, you may be able to get a rate that is lower than a conventional loan. As rates are headed up into the 4.3% and 4.5% range and beyond as the economy improves, having an FHA loan can really help you to get a very good deal. You will have to pay for mortgage insurance, and the cost is higher with FHA loans. But the lower rate you get often partially offsets that cost.
As far as what FHA rates will do in 2018, most experts think the rates will be in the mid 4’s by the end of the year. Historically rates for both conventional and FHA loans are too low given market conditions. So, if you are thinking about getting an FHA loan, now is probably a good time. Once the Trump tax cut effect kick in, we can expect rates to surge.
Below is more information about how to shop for an FHA loan these days.
Look at a Lot of Lenders with Experience Approving Lower Credit Scores
Shopping for an FHA loan is easier than a conventional loan. FHA loans are backed by the US government, so lenders can extend credit to you at better terms than you might expect. FHA only has a minimum credit score of 500 to get an FHA loan. But if you have a credit score under 600, you should start shopping for your FHA mortgage rate by checking with several lenders. The reason is that FHA approved lenders can have what are called overlays. This simply means lenders have the discretion to require a credit score higher than the 500 minimum set by FHA. Some lenders may have a minimum of 600, 620, or 640. The lower your score, the more lenders you should check. You could find a very similar program with two lenders where one has a rate .5% lower than the other.
Remember to Account for Mortgage Insurance
FHA loans are great for many situations, but you have to pay for expensive mortgage insurance to get that low interest rate. There are two types of mortgage insurance on FHA loans. The first one is an upfront premium of 1.75% of the loan amount. That is $1,750 for a $100,000 loan. That can be rolled into the mortgage. The other is the annual premium that is paid each month. The amount varies on the loan length and the loan to value or ‘LTV’. For a 30-year FHA loan with a down payment of less than 5%, your annual insurance premium with be .85% of the loan amount.
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 rates generally are on the way up in 2018. Mortgage 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. Rates are only going to go up this year as the economy gets even better than it is now.
FHA 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.