• How Do I Get an FHA Loan When Buying a Home?

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Reader question: "I've heard that FHA home loans are good for first-time buyers like myself, because they're easier to get and you don't have to put as much money down. Is this true? And if so, how do I get an FHA loan when buying my first house? Any advice would be much appreciated?"

    How to Get an FHA Home Loan

    Bearing in mind that the process varies slightly from one borrower to the next, it usually includes the four steps outlined below. You need to save enough money to cover your expenses, check your credit, gather your financial documents, and then locate an FHA lender. Here's how to go about it:

    Step 1 - Save Enough Money

    The first thing you need to do is start saving money. The more money you can put aside, the better off you'll be. Sometimes, when first-time home buyers ask how to get an FHA loan, they're talking about the application process itself. But the process actually begins long before you apply for a loan. It begins when you start saving money. How much money will you need? Let's examine some of the typical costs associated with an FHA loan.

    Down Payment Costs

    You will need to make a down payment of at least 3.5% when using an FHA home loan. This is one of the major appeals of the program -- it requires less money down than a conventional mortgage loan. But it all depends on your credit score. If your FICO credit score is below 580, you'll be required to put at least 10% down (if you can get approved at all). So let's assume you can get an FHA loan with the 3.5% down-payment option. Let's further assume your loan is for $250,000. This means your down payment will be around $8,750.

    Closing Costs

    But your down payment is not the only expense you'll face. When you get an FHA home loan, you'll also have to pay some closing costs. These costs will vary based on where you live, as well as the loan amount. As a general rule, you can expect your closing costs to be around 3% of the loan amount. So if we stick to our $250,000 mortgage scenario, this would come out to around $7,500 in closing costs.

    The seller might be able to contribute to your closing costs, but you shouldn't count on this. While the lender may allow this kind of "seller concession," it doesn't mean the seller will be inclined to do it. If you cannot afford all of your mortgage costs out of pocket (or with gifting from family members), you're simply not ready for a mortgage loan.

    But let's get back to the question at hand: How do I get an FHA loan when buying a home? We are talking about saving enough money to cover your home-buying costs. So far, we've talked about your down payment and closing costs. In the scenario we are using, these combined costs will come to $16,250.

    Cash Reserves and Other Expenses

    But you might need even more money in the form of cash reserves. These are additional funds the lender may require you to have, above and beyond your down payment and closing costs. This will vary based on the lender you use. Some don't require any cash reserves, while others require an amount equal to one or two mortgage payments.

    Let's shoot for the middle and assume your lender requires you to have enough money in the bank to cover your first mortgage payment. Using our $250,000 scenario, this would come to around $1,450 (depending on the interest rate and other factors). When I add this to my previous total including down payment and closing costs, I get a revised total of $17,700.

    And don't forget your moving expenses. Whether you rent a U-Haul truck or hire a moving company, you're going to have some kind of costs to deal with there. We might seem like we're straying pretty far from our original topic, how to get an FHA loan in 2011. But it all ties together. If you want to buy a house, you have to save up enough money for the various costs associated with the loan. This applies to FHA and conventional mortgages alike. In the scenario we've been using up to this point, you might need upwards of $17,000 for the loan (unless you can get the seller to cover some of your closing costs).

    How much of a loan will you need? Do you have that kind of money? Have you started saving yet? How long will it take you to save up the funds you need? These are questions you must answer early on in the home-buying process. You can't get an FHA loan unless you can afford the costs associated with the loan.

    Step 2 - Check Your Credit Situation

    What's your FICO score right now? Have you checked all three of your credit reports for accuracy? Do you even know what these terms mean?

    When you apply for a mortgage loan (FHA or otherwise), the lender will review your credit score and other aspects of your financial background. Your FICO credit score is a number between 300 and 850, and it shows how well you've repaid your debts over the years. A higher score will help you get an FHA loan, while a lower score will reduce your chances of getting approved. If your credit score is below a certain level, your application could be rejected by the lender.

    Now you can see how this relates to our key topic, how to get an FHA loan when buying a house. I recommend that you check all three of your credit reports as soon as possible. You can do this for free by visiting AnnualCreditReport.com (learn more). The information in these reports gets put through a scoring model, and the end result is your credit score. So if your credit reports contain errors, it could negatively affect your score. This in turn could hurt your chances of getting approved for an FHA home loan.

    In order to get an FHA loan, you'll need a credit score of at least 500 (and probably much higher than that). The Federal Housing Administration has a minimum credit-score requirement of 500, but most mortgage lenders require scores even higher than that. If you want to qualify for the 3.5% down payment, you'll need a credit score of 580 or higher.

    Step 3 - Gather Your Mortgage Documents

    This step is optional, at least at this stage of the process. You'll need to round up these financial documents eventually. If you want, you could skip this item and proceed to step #4 below. But you'll have to gather this information sooner or later, so you might as well start early.

    If you ask a mortgage lender how to get an FHA home loan, they'll probably tell you to do a couple of things. The first would be to submit a loan application. The second thing would be to provide a variety of documents so they can review your financial situation. These documents may include (but are not limited to) the following.

    Documents Need for FHA Loan

    • W-2 statements for the last two years (for income verification)
    • Pay stubs for the last month or two, showing year-to-date earnings
    • Bank statements for the last couple of months, for all of your accounts
    • Statements for any investment accounts you have (additional assets)
    • If you're self-employed, you'll need tax returns for the last two years
    • Divorce paperwork, if applicable
    • Bankruptcy paperwork, if you've ever filed for bankruptcy

    The lender might ask for additional item not on this list. But these are the most common documents needed for an FHA loan.

    Step 4 - Find an FHA-Approved Lender

    It's common misconception that the FHA lends money to home buyers. This is false. The money comes from a mortgage lender just like it does with a conventional loan. The Federal Housing Administration only insures the loan, so the lender gets reimbursed if the borrower defaults later on. In order to get an FHA loan, you'll need to choose a lender that's approved to offer these loans. On the HUD website, there's a tool that will help you locate an FHA-approved lender in your area. Here's the link for the tool.

    Once you find a lender, you would just tell them you want to use an FHA loan to buy a house. They'll probably have you submit an application, or at the very least will ask for certain information (like your name, Social Security Number, etc.). Then they'll check your credit score, income, and the other items we discussed in this article. At some point, the lender will give you a Good Faith Estimate that shows how much your closing costs might be. They'll eventually offer you an interest rate as well. At that point, you would either lock in the rate or keep shopping around.

    Where to Learn More

    This article explains how to get an FHA loan to buy a home. While this lesson is fairly comprehensive, it doesn't cover the entire process. An entire book could be written about FHA home loans! If you're seriously considering this as a financing option, I recommend that you continue your research on this website and elsewhere. You could probably find a HUD-approved housing counselor in your area, at least within driving distance. These people offer free and low-cost advice on this kind of thing.

    You might want to check out our FHA requirements page as well. If you have a specific topic in mind, try using the search tool at the top of the website.

2011 Home Buyer's Guide