One of the most nagging questions we have is whether we should rent or buy a house.
If you have decided to hit the purchasing highway, it is highly likely that you have considered using Federal Housing Administration (FHA) insured mortgage loan. If you have considered taking this route to own your dream home, then you might be wondering what the FHA loan guidelines are. You might also be wondering how to qualify for FHA loan. Well, wonder no more. EBC is here to answer all your questions and making your process of owning that dream home as easy as ABCD!
For starters, an FHA mortgage loan is insured by the US Federal Housing Administration (FHA), meaning it is a government-backed mortgage. It is meant for home buyers with low credit ratings. We already shared tips on how to afford a house if you have bad credit. Our today’s topic, however, focuses on the FHA point we did not expound much about.
How to Qualify for an FHA Loan
To qualify for an FHA mortgage loan, you need to meet the below requirements:
- Show proof of identification like your Social Security Number, and a steady income. You can use your recent tax filing or paychecks to prove this. Additionally, you need to confirm the ratio of your debt-to-income. With all your money obligations such as auto loans and student loans in the picture, this ratio needs to be 50% or less.
- A credit score that is above 500- with one caveat, and a credit score of above 580 to qualify for a 3.5% down-payment. If you do not have a credit history, you might still get approved. Do not give up! If you are not sure about your credit score, Credit Sesame, Your Score and More, and Money Tips are at your service.
- You also have to agree for the home you want to buy to be appraised by an approved FHA home appraiser.
- Show that you have been out of bankruptcy for the past 2 years prior to your application, in case you had filed for bankruptcy. Additionally, you must not have gone through the home foreclosure process for the past three years.
- You lender MUST be FHA approved.
- Ensure that your taxes, as well as any federal student loans that you have, are in order.
- The home you are buying is not for investment purposes. You must live there. In addition to this, you need to note that the home cannot be bought within 90 days of a prior sale. The title of the home has to be under your name or a living trust. Finally, upon settlement, the property has to be occupied within 60 days.
There are five steps involved in the whole process: Pre-approval, standard loan application, property appraisal, underwriting, and finally the mortgage approval stage. If you are lucky enough, you will sail through all these stages easily, with no hiccups. Some individuals, though, are not that lucky. This does not mean you have to give up on getting your dream home. Once you know what these stages entail, and in detail, you will be well prepared by the time you start the process.
1. Pre-approval Stage
This is the stage where the lender gets a chance to review your financial status. This way, the lender is able to determine whether you qualify for the FHA loan. If you do qualify for the loan, they will be able to determine how much they can lend you. This process is optional but it is very important- and highly recommended. When you start here, you will be able to know how much you will get from the lender, which will help you house hunt for a home that is affordable and within your budget.
This stage is also important because once the lender has determined you are credit worthy, and how much they can lend you, they will issue you with a letter that shows you have been pre-screened. When making your offers, you can show this letter to the sellers or the homeowners to help create more confidence in your offer.
2. Standard Loan Application Stage
Once you are done with the first, and you have been out there shopping for a home that suits you, you will need to fill out the Uniform Residential Loan Application (Fannie Mae form 1003). It is important to note that this form can be filled at any stage. However, it is mostly done once you are done shopping and you have picked and placed an offer on the house you want to buy. This is because you have to indicate the address of the home you want to buy as well as the type of loan you are applying for.
In case you are given the form to fill earlier on- before you pick out the house you want to buy, then you can leave that space blank. Other details needed in this application stage include your current employer’s information, your previous employer, your household expenses, how much you earn as well as the sources of your income among others. The form is usually detailed but it advisable to fill it to the best of your knowledge, and truthfully.
Like any other loan application process, this stage might come with costs. Whether you pay for the application fee at this stage or later on while closing the deal will depend on the policy of the lender.
3. Property Appraisal
The third stage is for the property to be appraised, which involves the lender determining the true value of the house you are buying. That is, the worth of the house, according to the current market conditions, has to be estimated. The appraiser can get this by looking for recent sales within the area, the sale of such properties in the recent times, as well as analyzing and including any unique features of the home in the estimation.
The appraisal process could be strenuous though, especially if the appraisal value is lower than what you are willing to pay. In case this happens to you, you can either look for another house or ask the seller to match the appraised value. Alternatively, you can get a loan of the appraised value and top up the other from your pocket.
4. Underwriting Stage
The underwriting stage will also involve a review of your documentations. This is one of the most strenuous steps in the whole process, and actually, the most important one. As a buyer, you can only deal with your loan officer or processor, but not the underwriter. The work of the underwriter is to review your documents, your credit score, and income among other factors. Through this, the underwriter decides whether or not you can get the loan.
The process is nerve-wrecking because in case there are any issues, it could lead to the provision of more details or you not getting the loan at all. If the underwriter finds some minor issues, you will be requested for a Letter of Explanation (LOE) or other actions can be taken so as to finalize the issue. In case there is a major issue with your information and data, then this might the end of you getting your dream via the FHA process.
5. Mortgage Approval Stage
If you have made it through the appraisal stage, then there is a high chance you will finally get the mortgage approved. This brings us to the final stage in the process, which is the mortgage approval stage.
At this stage, you will be needed to sign a couple of documents, and pay up any remaining fees and costs of the process. Once you have done this, then you will get the financing you need to finally buy that house.
When you have gone through the FHA loan guidelines, and you meet the necessary requirements, then you are ready to face the stages we discussed above. By the end of the mortgage approval process, you will get the financing you need to buy your house.