What is an FHA loan? What are the FHA loan qualifications? These are the questions that come into anyone’s mind who encounters the phrase “FHA loans” for the first time. The Department of Housing and Urban Development (HUD) has made FHA loan a part of their plans. FHA loans are given by the lenders approved by the Federal Housing Administration.
- What is the qualification for an FHA loan?
- What is the process of FHA loan approval?
Introduction To FHA Loans:
Are you looking to finance the purchase of a house? Don’t have the best credit rating? If so, then you should consider obtaining an FHA loan. It is a mortgage loan insured by the Federal Housing Administration that allows borrowers with sub-par credit scores to purchase a house. The FHA does not give the mortgage loans directly to the borrowers. It insures the loan from future default by the borrower, making it risk-free for the lenders who then lend you the money to buy and finance the house. FHA loans minimize the risk of loss for the lenders if the borrower becomes unable to repay the mortgage payment.
What is the FHA loan approval process?
The FHA loan process is a bit simple as compared to traditional loans. It does not indicate that there are no obstacles in the FHA loan process at all. Let’s see below to understand the FHA loan approval process:
- Step 1:
The first step is the pre-qualification process in which the lender reviews your application and financial situations. You will need to provide certain documents about your income; your paycheck stubs, tax returns, and other related materials to prove your income. You must also provide documentation for your assets; bank accounts, retirement accounts, the source of funds you are going as a down payment on the house, the closing costs involved, as well as the prepaid items for the subject property.
The Loan Officer will scrutinize your application and documentation, determine whether you are eligible to get the home loan or not, and how much you qualify for. It is the process done before you start hunting for a new home. After determining your eligibility, the lender will provide you with a pre-qualification letter. The pre-qual letter shows the seller that you’ve been pre-qualified to buy a house within a certain price range. Remember that you can only buy a house that falls within the specific price range.
- Step 2:
You and your real estate agent will look for a house. When you find the home that you’re most likely interested in buying, you will need to make a formal offer to purchase. Your offer to buy the property must be accompanied by your pre-qualification letter. This is the stage where you will have to show good faith by leaving an earnest money deposit to the title company that will be held in escrow.
- Step 3:
Buyers typically have a 10-day option period to get the property inspected by a licensed inspector of their choice to determine the property’s safety, soundness, and security; any repairs that need to be done to keep the home up to par. If all goes well, you proceed with the purchase.
The lender will need to know the real value of the property so they will ask a licensed third-party FHA appraiser to determine the value of the property.
- Step 4:
Underwriting and documentation is the most challenging step of the FHA loan approval. The lender’s underwriter will analyze everything about your credit, income, and asset. If the underwriter finds some issues with your file, then you can clear it by providing the required documentation and giving a letter of explanation. But in case the underwriter finds significant problems that would be the end of the line.
- Step 5:
Once the underwriter completes the underwriting process and is satisfied, your file is given a clear-to-close or CTC. Now you are ready to proceed and close on the property you are buying.
The next step is signing a slew of paperwork at the title company, you get the keys to your new home, and your loan gets funded.
How To Qualify for an FHA loan
Anybody who follows the guidelines set by the FHA can apply for the FHA mortgage loan. The borrower who has a FICO credit score of 500 – 579 can get the loan with a 10% down payment, with certain restrictions. On the other hand, those who have a FICO credit score of 580+ can get the loan with a 3.5% down payment. The better your credit score, the lower the interest rate you will be charged for the loan. If you know about the FHA loan requirements before starting the process of applying for the loan, it will save you time.