How to Apply for an FHA Home Loan

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Lesson summary: In this tutorial, you’ll learn how to apply for an FHA loan when buying a house. We will start with the background research that’s necessary, and then proceed all the way through to the closing.

In June 2010, the Home Buying Institute conducted a survey to assess the popularity of FHA loans among home buyers. The survey revealed that the vast majority of buyers (87%) planned to use the FHA program when buying a house. This is a higher percentage than any of our surveys from previous years — much higher, actually. This shows a trend of rising popularity.

But why is this financing option so popular? To answer this question, we must start with a basic definition:

An FHA home loan is a mortgage loan that is insured by the federal government. The government doesn’t actually make the loan (a lender in the private sector does that), but insures it against default-related losses. If the borrower stops paying back the mortgage for some reason, the government will cover the lender’s losses. The acronym FHA stands for Federal Housing Administration. This organization, which is part of HUD, is responsible for managing the program.

So when you apply for an FHA loan, you do it through a “regular” lender such as Wells Fargo or Bank of America. Many state and local lenders participate in the program as well. Some credit unions offer FHA financing. So you should have no trouble finding an FHA-approved lender in your area. Of course, whether or not you’re qualified for such a loan is a different story entirely. We will talk more about the basic qualifications in a moment.

Why are They So Popular?

The biggest benefit of an FHA loan is in the down-payment department. With this mortgage option, your down payment could be as low as 3.5 percent of the purchase price. You would have to put more money down on a conventional loan that is not backed by the federal government. This is the primary reason why home buyers flock to the FHA program.

The survey mentioned above also shows the popularity of the 3.5-percent down-payment option. Home buyers who said they wanted to apply for an FHA loan were asked a follow-up question — why do you want to use the program? The majority of them said it was because of the lower down payment. First-time buyers in particular find this feature appealing (though the program is certainly not limited to first-timers).

So how do you apply for one of these loans? How do you find lenders that participate in the program? And what are the basic qualifications for approval? Here’s what you need to know.

How to Apply for an FHA Loan

Most lessons on how to apply for an FHA home loan start with the application form itself. But this is just one part of a much bigger picture. To better serve you, we would like to start at the beginning. It all starts with a bit of budgetary math on your part:

1. Establish your budget. Pop quiz … how much of a mortgage payment can you comfortably afford each month? If you don’t know, then you’re not ready to apply for an FHA loan. You need to have a monthly budget in mind (and on paper) before you start talking to lenders. This will prevent you from taking on a mortgage that’s too big for you. Believe it or not, it’s possible to be approved for a home loan that exceeds your housing budget. It happens all the time!
2. Check your credit. Many articles on the mortgage-application process skip this topic entirely. This is a disservice to readers. You can’t talk about mortgage approval without talking about credit. They go hand in hand. Your credit score is extremely important during the application process. Some new rules went into effect in 2010, regarding credit scores and FHA loans. If you have a score of 580 or above, you could put as little as 3.5 percent down on the loan. If your score is below 580, you might have to make a down payment of 10 percent. In addition, a bad credit score can hurt your chances of qualifying for the loan altogether. Visit our credit center to learn more.
3. Round up your documents. When you apply for an FHA loan, you will have to provide a number of financial documents. Gathering these documents now will save you time and energy later on, when you actually submit your loan application. Start a folder for these documents. Gather your IRS tax returns and W-2 forms for the last two years. Write down all of the addresses where you’ve lived in the past. Collect your pay stubs and bank statements for the last two months. You might need other documents to apply for an FHA loan, but this list is a good place to start.
4. Find an approved lender. Remember, the government does not make loans directly to consumers. They simply insure the loans made by lenders in the private sector. So if you want to apply for the FHA program, you’ll have to go through one of these lenders. The good news is they’re pretty easy to find. In fact, most mortgage lenders participate in this program because it’s so popular with buyers. You can search for these lenders by city and state on the Department of Housing and Urban Development (HUD) website. Just do a Google search for “FHA approved lenders” to find the find the exact page, or click here.
5. Submit your application. Once you’ve done all of the preliminary work listed above, you’re ready to submit your loan application. You might be able to start this process online, depending on which lender you use. You can also apply for an FHA loan on this page of our website. Just make sure you have a firm budget established, before you move forward (see step #1 above).

These are the primary steps you’ll go through when you apply for an FHA loan. But the application alone does not guarantee approval. If you want to be approved for this mortgage program, you’ll have to meet the minimum guidelines. So let’s talk about those next.

Basic Requirements for the Program

I’ve written an entire article on this subject, so I won’t repeat it all here. But this article would be incomplete if we didn’t at least mention the basic requirements. Here’s what it usually takes to be approved for an FHA loan:

Disclaimer: Mortgage requirements change all the time. Just look at what all has changed since the housing crash! As a result, the specific requirements for the FHA program may have changed by the time you read this. For current guidelines, you should refer to the HUD website (www.hud.gov).

When you apply for an FHA loan, the lender will review all aspects of your financial background. They will check your credit score, your debt-to-income ratio, and your employment status. There are plenty of other “checkpoints” along the way, but these are the three most important factors.

Here are some of things they will look for:

Credit Score — The Department of Housing and Urban Development (HUD) requires FHA borrowers to have a credit score of 500 or higher, on the FICO scale. But most lenders will require an even higher score than this. Remember, you have to meet the lender’s guidelines as well as the FHA’s. Many mortgage lenders require a score of 620 or higher. This is referred to as an overlay. The lenders “lay” their own requirements over the basic guidelines established by HUD, hence the term overlay.

Debt Ratios — When you apply for an FHA loan, you will also have to provide documents that show how much money you earn. The lender will compare your income to the amount of money you spend on your various debts, including your future mortgage payment. This is referred to as your debt-to-income (DTI) ratio. The government does not have a specific requirement for DTI ratios. It comes from the lender. So the maximum DTI ratio will vary, based on the lender you use. The 41-percent rule applies in most cases. This means that if your total debts (credit cards, mortgage, car loans, etc.) account for more than 41 percent of your income, you might be turned down.

You can learn more about the basic requirements here.

This article explains how to apply for an FHA loan. If you would like to learn more about the home buying process, use the search tool at the top of this page. It will give you access to more than 800 articles on mortgages, house hunting and more.