How to Get Started Applying for an FHA Loan
If you’re interested in getting an FHA mortgage loan to buy a home, you aren’t alone. Borrowers across the U.S. are intrigued by FHA loans for several reasons, including their incredibly low down payment requirements and the fact that you don’t need perfect credit to apply.
While qualifying for an FHA loan might be easier than qualifying for a privately-insured mortgage, that doesn’t mean you should go into the process blind. Here’s how to begin the FHA loan process, and hopefully get one step closer to buying the home of your dreams.
Determine Your Budget and Prepare Documentation
One of the most important steps in beginning the FHA loan application process is determining your housing budget -- and that starts with determining how much in monthly mortgage payments you can actually afford.
To determine this, begin setting aside money for your down payment. Take the amount you can reasonably set aside, and add that to your monthly rent costs, and you’ll have a good estimate of a monthly payment that won’t make you lose your shirt.
Since FHA insured loans only require a down payment of 3.5%, hopefully the down payment saving process won’t take you too long. Despite that, it’s beneficial to have a larger down payment, since that can usually reduce your interest rate at closing.
On the other hand, if you have trouble saving your 3.5%, there may be down payment assistance programs that can help. These can vary from state to state, so it pays to do your research beforehand.
After estimating your monthly mortgage payment and starting to save for your down payment, you’ll also want to check your credit history. While the FHA allows borrowers with a credit score as low as 580 to qualify for home loans, having a better credit score can certainly help.
So, if there are any problems or inaccuracies on your credit score that could be reducing your credit, make the effort to clear them up before beginning the FHA loan application process.
Next, you’ll want to prepare documentation to show your prospective mortgage lender. This should include:
Documentation of income: This should be at least two years of W-2s or 1099s from your employer. If you’re self-employed, you’ll typically need three years of records, plus a year-to-date profit and loss financial statement. This will be used to verify your income, since your lender will, at some point, assess you on your debt-to-income (DTI) ratio, a comparison of your monthly income to your monthly debt payments. Typically, the maximum DTI ratio allowed for FHA loans is 43%. Despite that, some exceptions are made for borrowers who have great credit, can provide a large down payment, or have significant cash reserves. Alternatively, some lenders may be stricter with DTI, so it may be helpful to pay off some of your other debts before beginning the FHA home loan application process.
Tax information: In addition to your income and employment information, you’ll likely need to provide two years of full tax returns.
Additional financial documentation: Bring updated statements for any bank accounts or retirement accounts you have. In most cases, statements for the last three months are acceptable.
Personal identification: Make sure you possess an up-to-date driver's license and a social security card. For non-citizens, an up-to-date green card or work permit will usually do the trick.
Bankruptcy information: If you’ve been through a bankruptcy in the last 10 years, you’ll also need to provide documentation about the bankruptcy, as well as your discharge papers.
Begin Shopping Around for Lenders
While FHA loans are somewhat standardized, that doesn’t mean that some lenders aren’t better than others. And, to find the lender that’s right for you, you might have to shop around a bit. FHA loan interest rates can vary significantly from lender to lender, so it’s best to compare at least several lenders if you want to get the best deal possible. Plus, different lenders often charge different levels of fees -- and the less fees you have to pay, the better.
Factor Mortgage Insurance Premiums into Your Equation
One thing that won’t change from lender to lender is the size of the mortgage insurance premium (MIP) that you’ll have to pay. FHA mortgage insurance comes in two different stages. The first is a one time fee, which is usually 1.75% of the loan amount, and is due at closing.
The second is an annual fee, which usually ranges from 0.45% to 1.05% (and is split up over your 12 months of mortgage payments.) These MIP amounts are pre-determined by the FHA, and vary depending on the size and duration of your loan. Unlike with a privately insured mortgage, there’s no way to reduce the amount of mortgage insurance that you have to pay, even if you’ve built up significant equity in your home.
Make Sure Your Lender Has a Good Reputation
In addition to finding a lender that offers you a good interest rate and doesn’t charge too much in fees, you’ll also want to make sure you’re working with a lender that has a good reputation for customer service. Better lenders can typically reduce the time it takes for your loan to close, and will be more accessible if you need to ask them questions. While some FHA lenders have large in-person operations, others are 100% online, so you should determine whether you want in-person service before making a final decision on a lender.
If you want FHA mortgage help, or you just have a few questions you want answered, don’t hesitate to contact us today for a free home loan consultation.