The Department of Housing and Urban Development (HUD) has updated portions of their handbook relating to FHA loans. Among other things, this handbook explains the seven key stages of the FHA loan process, from application to closing.
Home buyers who plan to use a government-insured mortgage to buy a house will benefit from perusing HUD Handbook 4155.2, which explains the FHA loan process in detail. But you’re a busy person, and it’s a large document. So we’ve broken out the key points below.
Overview of the FHA Approval Process
The HUD handbook outlines 11 steps in the FHA application, underwriting and approval process. But the last four steps only pertain to mortgage lenders. So as far as home buyers are concerned, there are seven stages to the FHA loan process. (Unless, of course, the borrower is disqualified, in which case there may only be two or three steps. But let’s stay positive.) Here are the seven key steps along the path to approval.
Step 1 – Lender Identification
As a borrower, you must contact a HUD-approved mortgage lender to find out if you’re eligible for the program. Most lenders offer these government-backed home loans, because they’re in high demand these days. All of the major lenders offer FHA mortgages (Bank of America, Wells Fargo, Citi, etc.). Many smaller and regional lenders participate in the program, as well. For your convenience, you’ll find a list of approved lenders on the HUD website. You can even search by city and state.
Step 2 – Loan Application
If the lender determines you are eligible for an FHA loan, you will complete a standard loan application (Fannie Mae form 1003), along with an addendum specific to this program (HUD form 92900-A). The loan officer will also request a variety of financial documents. These include IRS W-2 forms, bank statements, tax returns, pay stubs and the like. All of this goes into your application package. To learn more about this stage of the FHA process, refer to HUD Handbook 4155.1, Chapter 1, Section B, “Documentation Requirements.”
Step 3 – FHA Case Number
Every FHA mortgage has a case number assigned to it. This is a unique number that identifies the individual loan and borrower. Think of it as a serial number for home loans. There’s not much for the borrower to do in this step. But it had to be included for continuity purposes, and also to reflect the seven steps of the FHA process outlined in the HUD handbook.
Step 4 – Property Appraisal
This is a key step in the FHA process because it determines whether or not your loan will move forward. The mortgage lender must conduct a property appraisal through a licensed appraiser to determine the current market value of the home you are buying. The appraiser will also ensure that the house meets all of HUD’s property requirements. To determine the market value of the home, the appraiser will look at recent and comparable sales in the area. To learn more about the FHA appraisal process, refer to HUD Handbook 4155.2, Chapter 4, “Property Valuation and Appraisals.”
Step 5 – Mortgage Underwriting
Underwriting is a “make-or-break” step in the FHA loan process. If you clear the underwriting stage, there’s a 99% chance you’ll reach the finish line. But many obstacles can arise in the underwriting stage. The underwriter will review your file in accordance with HUD’s mortgage credit-analysis guidelines. It’s the underwriter’s job to determine if you have the “ability and willingness to repay the mortgage debt.” He or she does this by evaluating your credit history, credit score, employment situation, income stability, and debt-to-income ratio, among other factors. To learn more about the FHA underwriting process, refer to HUD Handbook 4155.1 Chapter 4, Section C, “Borrower Credit Analysis.”
Step 6 – Underwriting Decision
Once the underwriter has reviewed your file, he/she will either approve or reject it. If the file is approved, you are “clear to close” and will move on to step seven below. If the underwriter rejects the file for some reason, you’ve reached the end of the road. In the case of rejection, the lender will notify you of the underwriter’s decision and may even explain why he/she came to that decision. Let’s assume you get a green light from the underwriter and move on to the final step in the FHA process.
Step 7 – Closing Process
If your loan is approved by the underwriter, you’ll proceed to the final step in the FHA approval process, which is closing. This is where the lender “closes” the loan by having all documents signed, and by ensuring that all monies are distributed to receiving parties. Your job, as the borrower, is to carefully review all of the loan documents to ensure accuracy. You’ll also have to present a check to cover all of your closing costs (appraisal fee, document preparation fee, loan origination fee, etc.). To learn more about the FHA closing process, refer to HUD Handbook 4155.2, Chapter 6, Section A, “Loan Closing Policies.”
This article explains the seven basic steps of the FHA mortgage process. We have included the relevant sections of various HUD handbooks, where applicable. If you would like to learn more about the application, underwriting and approval process, we encourage you to read those supporting documents for additional information.