How Does the FHA Loan Approval Process Work?

Understanding the FHA loan approval process is essential if you plan on getting an FHA mortgage in the near future. The FHA is a government organization that insures residential mortgages made by lenders. Their programs can be very helpful to prospective homeowners. Here are the basics of the FHA loan approval process and how it works.

Where to Find FHA Loans

In order to apply for an FHA loan, you will have to locate a certified FHA lender. The FHA does not actually write any loans and therefore, relies on regular banks and mortgage lenders to write the loans for them. They are involved only to insure the loan. This means that you should be able to find several FHA lenders in your area. Most banks work with the FHA in some capacity. Some banks work with the FHA programs more than others, but you should not have any trouble locating a lender that participates in FHA programs. 

Pre-Qualification

The first step in the process is pre-qualification. This step involves you speaking with the lender about your situation and getting pre-qualified. During this step, they will gather information about your income and liabilities. They will then give you a general idea of how much money you could be able to borrow.

Choosing a Program

The FHA has several different loan programs that you could choose from. For example, they have a first time home buyer loan and a program to fix up old homes. These are two of the most popular programs, but they also have several others available. During this stage, you need to look at all the programs and decide which one you want to apply for. 

Application

The application process requires you to give them a great deal of personal information. They are going to want to know everything about you and your financial situation. You will give them your name, address, social security number, information about your debts, and anything else that they ask for. 

Processing

Once you apply for the loan, the lender will then process it. They will pull your credit history and evaluate it. They will verify your income and your employment situation. They will look at all of the accounts that you have and your total debt. They will use debt-to-income ratios to determine if you meet their borrower guidelines. During this step, they will determine if you pay your bills on time, if you make enough money for the loan you are requesting, and a great deal of other information. 

Appraisal

The lender will then want to appraise the house and make sure that they can lend against it. They will hire an appraiser to go look at the house come up with a value. 

Underwriting

At this point, if everything looks good, they will send the loan to underwriting. This is like a final check to make sure that the loan is acceptable.

Closing

If everything goes well up to this point, they will then schedule a closing. You will attend the closing, sign several papers and then the mortgage and sale of the house will be completed.



How much will the FHA lend?



To achieve FHA loan approval on your private mortgage, you will need to make sure your mortgage amount is under the FHA limit. The limit is set on a county-by-county basis within each state. You can research limits in your specific area on the FHA website. Each county has a list of four separate numbers; these provide limits for a single-family residence all the way through a quad-residence. If you are purchasing a home with more than four units, you will not qualify under the FHA home loan program. As of August 2010, limits begin around $200,000 for less expensive areas, but high-price areas, such as in California, see single-family limits well into the $700,000s.



Can you qualify for an FHA loan while in a debt settlement?



You will need to be creditworthy in order to receive FHA loan approval. While the FHA does extend loans to individuals with low down payments and incomes, the organization is very strict about credit scores. As a result, if you are currently going through a debt settlement process, you will not likely qualify for an FHA loan. The good news is that, if you can wait two years, the FHA will likely approve you in the future. Any settlement, late payments, defaults or other negative credit information should be at minimum two years expired prior to when you apply for an FHA mortgage guarantee.



How many times does your credit get checked during an FHA loan approval?



Your credit will be checked one or two times during the FHA loan approval process. If you are applying directly with an FHA approved lender, the lender will run a credit check for both parts of the application process; this means the credit check will be used to underwrite the private loan and secure the FHA guarantee. If you are working with a lender that does not have a relationship with the FHA, you will have to submit two applications and, therefore, go through two credit checks. One credit check will go to the private lender issuing your mortgage, and one will go to the FHA while it considers whether to guarantee your loan.



What credit score do you need for an FHA loan approval?



In order for you to achieve FHA loan approval, your credit score should be in the A credit rating zone. This generally means your score is over 720 and puts you in the "low risk category." FHA loans are forgiving in terms of down payment and even income, but they are very strict in terms of credit. If you do have previous negative credit history, you may still qualify as long as

  • defaults and bankruptcies are more than two years old, and
  • foreclosures are more than five years old, and
  • you do not owe the government any past-due money, including late taxes, OR
  • your score suffered from a one-time, negative problem that has since been resolved.
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