Applying for an FHA Loan
The Application Process for FHA Home Loans
In basic terms, an FHA loan is a government-insured mortgage. Due to the fact that these loans are being offered by the government, instead of a for-profit company, FHA loans have a variety of benefits that can make it easier for you to buy your dream home without breaking a big sweat.
What are the basic eligibility requirements for an FHA loan?
Credit Requirements: In order to qualify for an FHA loan with a low down payment plan (currently set at 3.5%), you’ll need a FICO credit score of 580. If your score is lower, you may still be able to get an FHA loan, but most likely at a higher rate.
Down Payment Requirement: To start, you’ll need to be able to provide the 3.5% down payment from an acceptable source. In other words, the lender (and the government) wants to make sure you aren’t taking on more debt in order to fund your down payment. So, if you’re planning to source the down payment from your personal funds, you’ll most likely need to show the last 2-3 months of your bank account statements.
If you’re planning to get the money from the sale of stocks, bonds, or other investments, you’ll need to document both the sale of the investment and the transfer of funds to your bank account. And, if you’re receiving all or part of the downpayment as a gift from a friend or family member (congratulations!), you’ll also need to document that.
Personal Income Documentation: After making sure that your down payment is squared away, you’ll need to document your personal income and employment status, often for the last 2 years. And, while it might sound obvious, the FHA and HUD require that lenders only consider income that’s “legally derived”-- so, if you’re running a criminal enterprise, an FHA loan might be out of reach (also, probably stop that!). Plus, lenders are only allowed to consider income that’s been officially filed in your taxes -- so if you have tax issues or shoddy tax records, it could add complications to the loan application process.
Passing the CAIVRS Reporting System: Even if you have seemingly good credit and a steady income, the government wants to make absolutely sure that you don’t have any outstanding federal debt. To do this, they use a system called CAIVRS (Credit Alert Verification Reporting System), which according to the U.S. Small Business Administration (SBA), is “used to determine if a loan applicant has any federal debt that is currently in default or foreclosure or has had a claim paid by the reporting agency within the last three years.” Yes, Big Brother is watching.
Primary Residence Requirements: Because the FHA was designed to help make it easier for Americans to own their own home, the home you plan to purchase needs to be your primary residence. So, for better or worse, you can’t legally use an FHA loan to purchase a vacation home in the hills -- or a million dollar investment property. The FHA defines a primary or principal residence as “property that will be occupied by the borrower for the majority of the calendar year,” and, while it’s not like the government is watching your house (we think), it’s a good idea to stay on the right side of the law.
However, there are some exceptions to this rule-- particularly for members of the military who want to buy a home, but may be prevented from occupying it immediately due to a deployment.
Can you apply or pre-qualify for an FHA loan online?
Yes. Because FHA loans are not offered by the government (only insured by the government), you can find an FHA approved lender online-- and often, you can fill out the entire application online, with a minimal amount of paperwork. While you still may have to make calls to government agencies, your employer, family members, or your accountant to make sure you can submit the correct documentation, today’s FHA loan application process is faster and more streamlined than ever before.