How to Get an FHA Loan: Requirements and Simple Guide

Applying for a Federal Housing Administration (FHA) mortgage is similar to applying for any other loan. You apply, turn in your documentation, then if everything looks good, you get a pre-qualification letter. With that letter in hand, you can start home shopping!

Generally, FHA loans are easier to qualify for than other types of home loans, but they also have stricter property requirements. Let us walk through what you need to know about applying for an FHA loan.

FHA loan requirements at a glance

It is important to understand the FHA loan requirements that borrowers must meet. Keep in mind that there are two categories of FHA qualification requirements:

1. Requirements that pertain to the borrower.

2. Requirements that determine if the property the borrower wishes to purchase meets the FHA’s standards.

Borrower requirements

Requirement	Details
Credit score	Minimum 500 with 10% down payment; 580+ for 3.5% down payment. (Most lenders will require a minimum of 620.)
Down payment	3.5% with 580+ credit score; 10% with 500 to 579 credit score. (However, most lenders require a minimum score of 620.)
Debt-to-income ratio	Maximum 43% (can go up to 56% with compensating factors).
Employment	Steady income source for at least 2 years.
Occupancy	Must be your primary residence.
Bankruptcy or foreclosure	Waiting periods apply (2 to 3 years depending on circumstances).

 

Property requirements

The FHA may be more lenient in borrower credit and down payment qualifications, but they exercise strict standards when it comes to the condition of the property. Minimum Property Standards (MPS) are in place to safeguard you from buying a home that is unsafe or in need of expensive repairs.

Below are some of the key MPRs you should be aware of as you search for a new home:

Requirement	Details
Property type	Must be a one- to four-unit residential property. This includes: Condos, if FHA-approved Townhomes Manufactured homes, if approved by the U.S. Department of Housing and Urban Development (HUD)
Condition and safety	Property must meet the FHA's requirements for safety, security, and soundness.
Access	Must have safe and adequate pedestrian or vehicular access from a public or private street.
Utilities	Property must have adequate heating, water supply, and sewage disposal.
Electrical and plumbing	Systems must be functional and up to code with no exposed wiring or significant defects.
Roof	Roof must be in good condition with at least 2 years of remaining life expectancy.
Foundation	Must be structurally sound with no major cracks or evidence of water intrusion.
Pest inspection	Required if appraiser notes infestation or damage. Must be free of termites and other pests.
Lead-based paint	Homes built before 1978 must be free of deteriorated lead-based paint; peeling paint must be properly remediated.
Basement and crawl spaces	Must be dry and adequately ventilated; no standing water or excessive moisture.
Environmental hazards	Property must be free of hazards (for example: sinkholes, excessive noise, flood zones without proper insurance).

 

Understanding the requirements of an FHA loan will go a long way in helping you determine if it is the right option for your homebuying needs. But how do you go about getting one? Below we will dive into it.

Step-by-step guide to getting an FHA loan

Now that you have reviewed the FHA benefits, where do you begin if you want to pursue this mortgage option? From initial research to closing, here are the steps you may take to obtain an FHA loan.

Step 1: Check your eligibility

The first step to acquiring your FHA loan is ensuring you are eligible for it. Here is a list of the qualifying factors borrowers must meet to be approved:

1. Minimum Decision Credit Score
   
   According to the FHA, to be eligible for FHA-insured financing a borrower’s Minimum Decision Credit Score (MDCS) must be at least 500. However, that does not mean that an approved FHA lender will accept a score of 500. Aside from following the FHA guidelines, every approved lender has its own requirements. These additional requirements are called overlays. Most lenders have an overlay that the minimum credit score they will accept is 620.
   
   
2. Qualifying Ratios
   
   First: Your mortgage payment versus your gross income before taxes. This ratio cannot exceed 46%. Mortgage payment includes principal and interest, property taxes, homeowners insurance, mortgage insurance, homeowner association dues, and any special assessments.
   
   Second: The other important factor is the debt-to-income (DTI) ratio. Your DTI cannot exceed 43% (sometimes 56% depending on your lender and other factors) and includes your housing costs and recurring bills like credit cards and car loans.
   
   
3. Primary Residence Requirement
   
   FHA funding is only for owner-occupied properties. You cannot use FHA funding to buy a second home, a vacation home, or investment properties. You can buy a duplex, triplex, or fourplex, but you must be living in one of the units as a primary residence.
   
   
4. Down Payment Determination
   
   The down payment you will need depends on your credit score, however most lenders typically require a minimum score of 620 to qualify. The higher your credit score is, then the lower your down payment requirement is likely to be.
   
   
5. Income Reliability Requirements
   
   Borrowers need a consistent income that they can document. That can include a job, self-employment income, social security, pensions, and child or spousal support.

Step 2: Calculate what you can afford

The best place to start when you begin to create your homebuying budget is an online mortgage affordability calculator. You can enter your income, monthly debts or other payment obligations, and the down payment you expect to provide. Along with other factors like the loan term and interest rate, the calculator will be able to provide an indication of the estimated home price you are likely to afford or be approved for.

Along with the home price and monthly mortgage payments, you should also consider the up-front costs at closing such as the down payment, closing costs and mortgage insurance payments. All FHA loans will have mortgage insurance applied. However, it is not called private mortgage insurance (PMI). It is called MIP, which stands for mortgage insurance premium. MIP works a bit differently from PMI. 

With MIP, it depends on the down payment. For a down payment under 10%, MIP is paid for the loan's entire life. With a 10% down payment or more, the MIP is paid for the first 11 years. Note: an up-front MIP (UFMIP) is paid at closing while an annual MIP is calculated every year and paid over 12 months.

Step 3. Gather your documentation

Mortgage application documentation varies based on the type of loan. Your lender will tell you what is needed for your situation but here is a list of the documents you will likely need to have ready.

FHA application documents:

• Government-issued ID

• Bank statements from the last 2 months

• Pay stubs from the last 30 days

• Tax returns—business and personal—from the last 2 years

• W-2s or 1099s for the past 2 years

• Retirement statements from the last 2 to 3 months

• Social security award letter

Providing complete documents quickly will help underwriters work efficiently as they review your application. We have compiled some tips to help. Be prepared to answer questions or provide additional details if further clarification is needed.

Step 4. Find an FHA-approved lender

Though they are backed by the government, FHA loans are issued by approved private lenders like banks and credit unions. Not all lenders offer every type of FHA loan, so it is important to research which lenders will be able to provide the best option for you. 

Do not limit your search to lenders that promise the lowest rates. You want to feel comfortable asking questions and confident in their experience handling the complexities of FHA loans. Ask questions about how often they process FHA loans, what type of loan they recommend for you, and what total costs are involved.

Step 5. Get pre-approved

Once you confirm that you qualify, have your documents organized, and have done your research, it is time to apply for your FHA loan. Before getting pre-approved, you will likely obtain pre-qualification from your lender. Pre-qualification is not an official stamp of approval, but it will set the parameters of how much home you can likely afford. The process usually involves sharing some preliminary income details. Your lender then completes a soft credit check to make an initial estimate (it does not affect your credit score). Following your pre-qualification process, the lender will work with you on pre-approval, which requires more documentation and a hard credit check.

Within 3 business days of receiving your application, your lender is required to provide a loan estimate. This 3-page document details important figures including your anticipated down payment, interest rate, monthly payment, and total closing costs. A loan estimate is not an official approval or final offer of rates and costs. But it is a helpful document to get a realistic view of what you will be responsible for paying if it moves forward. Take time to review the pages, ask questions, and compare choices if you are still deciding between more than one lender. Now is the time to crunch the numbers and make sure you can afford the up-front costs and monthly payments.

The time it takes to receive pre-approval differs from lender to lender. However, it is important to note that the average timeline between application to closing is 30 to 45 days.

Step 6. Find an experienced real estate agent

You are not required to work with a real estate agent, but they can be valuable during your homebuying experience. When you interview potential agents, let them know you plan to use an FHA loan. Make sure they have extensive FHA experience and can guide you through the process with confidence. Be sure to reach out to your lender before you hire an agent as they may be able to provide access to an entire network of trustworthy agents who they have experience working with.

Your agent can help eliminate properties that do not meet FHA criteria and ones that fall outside the FHA mortgage limits in your area. When it comes time to make an offer, they will work on your behalf to negotiate the best possible deal, which may include the seller paying some of your closing costs.

Step 7. Ensure the home meets FHA standards

This step is where having an FHA-experienced real estate agent can become a huge help. It will be their job to steer you away from properties that are not likely to meet the FHA’s Minimum Property Standards so you can focus on the homes that do. 

Step 8. Make an offer and complete your mortgage application

Once you have found a house that you can envision as your home, it is time to put in an offer and complete your mortgage application. Depending on the market temperature, you may or may not have some room to negotiate with the seller on specific contingencies. Your real estate agent will be able to help you work through the details and create an offer that appeals to the seller. 

This is also when you will finalize your mortgage application, ensuring all of the required documents are with the underwriter for review and receive funding approval from your lender.

Step 9. Navigate the FHA appraisal and inspection process

FHA inspectors are trained to look out for specific safety and durability issues such as leakage, asbestos, and roof damage. They will also perform a traditional appraisal to estimate the home’s current market value.

Any number of issues can slow down the loan process during this step, including property safety concerns and the need to renegotiate an offer due to an appraisal coming in lower than the amount you agreed to pay.

Step 10. Close on your new home

This is where all the moving parts come together. Your loan is approved, the inspection has checked out, and your offer is finalized. Time to make it official by signing on the dotted line and paying any necessary up-front costs.

FHA closing costs typically add up to 3 to 5 percent of the loan amount. That can sound like a lot when you are trying to keep out-of-pocket expenses down. Fortunately, FHA loans are known for offering creative options to avoid high up-front costs. That is another reason to work with an experienced FHA lender and real estate agent.

Is an FHA loan right for you?

Like any other mortgage application, there is a lot to consider when you are applying for an FHA loan. Questions and concerns are a normal part of the process, so do not be afraid to bring them to the attention of your loan officer.

FHA loans are great for anyone who wants a home and meets the FHA loan qualifications. They are especially advantageous for first-time homebuyers, but not exclusive to them.

Before applying, make sure you meet the minimum requirements and have all of the needed paperwork ready to submit. Be sure to speak with a loan officer to help you confirm that you are a good candidate or if there is another loan option that will better suit your situation and needs.

 

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