9 Easy Steps To Apply For An FHA Loan

FHA home loans are an excellent option for potential homebuyers. It bridges the gap to homeownership for borrowers with less than perfect credit or little savings for a down payment. But like any loan, you must take the right steps to get approved for an FHA loan. How do you know what you need to apply for an FHA home loan? Read on to find out how!

1. Have Verifiable Income

All FHA loans require verifiable income. In other words, income that's likely to continue, such as wages, tips, bonuses, and other earnings that are "stable and reliable."

How you verify your income will vary based on how you earn it.

Employees can prove their income with a W-2 and pay stubs.

Things get tricky when you work for yourself or own your own business. But that doesn’t mean impossible.

FHA loans are available for borrowers with all types of earnings.

As an employee, your lender will ask for your W-2 as proof of income.

Self-employed or business-owner borrowers can submit the past two year’s tax returns. You may also need to provide profit and loss statements.

Either way, the lender will likely ask for a few months of bank statements. If you don’t have hard copies, your online banking portal may have an option to print previous statements.

2. Be Able To Afford The Housing Payment And Any Existing Debt

Income is only part of the equation. Lenders are also concerned about how much debt you have and your ability to pay it. It’s called your debt-to-income ratio, or DTI. Your DTI is a comparison of your monthly income to your monthly debts.

Common examples of debts in your FHA debt-to-income ratio include:

• The new FHA mortgage payment
• Other current mortgage payments
• Car payments
• Student loan payments
• Credit cards
• Installment loans

Lenders call this your front-end and back-end ratio. The front-end ratio could also be called the mortgage-to-income ratio. It measures the portion of your income set aside for mortgage payments.

If you earned $6,000 monthly and had a mortgage payment of $1,500, your front-end ratio would be 25%. Ideally, lenders prefer it to be no more than 31% of your income to qualify for an FHA loan.

Your back-end ratio calculates how much your income goes toward all other monthly debts.

Generally, FHA lenders suggest a back-end ratio of no more than 36% because the more debt you have, the more likely you'll default on your mortgage payment.

In the previous income example of $6,000 per month, your monthly debts shouldn’t exceed $2,160 to align with the FHA guidelines.

Remember, all lenders are not created equal. Some FHA lenders put more weight on DTI than others. You may have some wiggle room with your DTI ratio if you have other qualifying factors, such as a great credit score, an established employment history, or a larger down payment.

3. Save At Least A 3.5% Down Payment

According to Zillow, nearly 70% of potential homebuyers said saving enough for a down payment was the biggest obstacle to buying a home. But FHA loans are an exception – they’re known for their low-down-payment option. It’s one benefit that draws homebuyers to the FHA loan program.

It can vary by the purchase price, but you usually need 3.5% of the home’s purchase price for a down payment. Remember that 3.5% is the minimum amount. Normally, most lenders require a credit score of 580 or higher to qualify for this low down payment deal.  (And in 2024, you're probably looking at a score of 640 or more).

You may need to put down at least 10% if your credit score is lower. Still, even with 3.5% on a $220,000 house, you need $7,700 for a down payment. And that’s a big chunk of change. Luckily, FHA loans allow you to use “gifts” as the source of your down payment. 

FHA loans allow family members and employers to chip in toward the down payment amount. That means if your rich uncle wants to give you the cash you need for a down payment, he can.

Most of us don’t have a rich uncle, but it’s nice to know that option is available. If you accept gift funds, you must follow the FHA gift fund rules, including proof that the money is a gift (and not a loan).

4. Have An Established Credit History

Another significant advantage of an FHA loan is flexible credit guidelines. The program has one of the lowest credit score requirements out of all home loan programs available. But lenders will look at more than your credit score – your credit history plays a role, too. If you haven’t looked at your credit report in a while, take the time to go through it.

You can get a free credit report from the three major credit bureaus at AnnualCreditReport.com.

As you go through your credit history, pay attention to:

• Types of credit
• Number of accounts
• How long accounts have been open
• Total debt
• Payment history
• Credit utilization
• Adverse events (bankruptcies and collection accounts)

Lenders look for established accounts with a good payment history, low debt, and no missed or late payments. Especially in the year leading up to your mortgage application, make all payments on time and don’t overextend your credit usage.

A rule of thumb is to keep your credit card balance accounts at less than 30% of the credit line.  If you can keep it closer to 10%, that's even better. Your credit utilization can affect up to 30% of your credit score. Low credit balances show that you're a responsible credit user.

Don’t let your credit history catch you by surprise. The earlier you prepare and establish your credit, the higher your chances of loan approval become.  

5. Have A Credit Score Of At Least 600

FHA loans have the lowest credit score requirements of any home loan program today.  

Of course, if you can increase your score, you should.  

3 Ways to Increase Your Credit Score Fast

Become an Authorized User

Ask a friend or a family member if they will add you as a user on their credit card.  Your credit file will adopt their payment history, so if it's a card in good standing and they've paid on time, it will look like you made all those on-time payments on your credit report!

Report Your Rent

If you rent, your landlord doesn't normally report your payment history to the credit bureaus, so your credit doesn't improve even if you pay on time.  Look into "rent reporting" services as they report your past payment history up to 2 years.

Pay down your credit cards

The #1 way to get a higher credit score is to reduce the amount you owe on them, especially if you have big balances.  This not only helps your credit score but also your debt-to-income ratio.

That’s because higher credit scores can mean lower interest rates. And lower interest rates can save you tens of thousands of dollars over the life of your mortgage.

With 10% down, you *could potentially be approved with a credit score lower than 580. FHA home loans are an excellent option for borrowers with a negative credit event on their credit report but have the funds in hand to start over. It’s a great way to get a fresh start in a new home.

6. Purchase A Home That Does Not Exceed FHA loan Limits

FHA loan limits cap how much you can borrow to buy a house. While the standard limit is $498,257, the maximum amount can vary by state, city, or county. That’s because the program bases limits on the median home prices in an area.

Want to know how much you can borrow with an FHA loan where you live? Visit the US Department of Housing and Urban Development to look up FHA loan limits by state and county.

7. Apply For The Correct Type Of FHA Loan

Like most things, FHA loans aren’t “one size fits all.” You have a few options when buying a home with an FHA loan. Most borrowers use a standard FHA loan program to secure their dream home. You put down 3.5% of the purchase price, look for a home within the loan limits, and buy a home you plan to live in yourself.

Sometimes, other circumstances can lead you to different FHA loan types. You might want to refinance, buy a fixer-upper, or build a home from the ground up.

FHA cash-out refinance

Once you build equity in your home, you can tap into it by refinancing. You might do this to consolidate debt, fund an emergency fund, pay for college, or make home improvements. The FHA allows borrowers to take up to 80% of the home’s value in a cash-out refinance. 

FHA streamline refinance

Current FHA loan holders can qualify for an FHA streamline refinance. It lets you take advantage of lower interest rates, shorten the repayment term, or go from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

FHA 203(k) loan

If you've fallen in love with a fixer-upper and don't have the funds to make repairs, an FHA 203(k) loan is a great choice. It can roll the purchase price and renovation costs into the loan amount, allowing you to borrow up to 110% of the after-repair home value.

FHA construction to permanent loan

Buying land and financing the cost of building a home is possible with an FHA construction to permanent loan. It allows you to pay one set of closing costs. After construction, the loan automatically becomes a permanent loan.

8. Understand The Costs Of An FHA Loan

Like most loans, FHA loans come with fees attached:

• Mortgage Insurance
• Prepaid items 
• Lender and third-party fees

Lenders require you to have private mortgage insurance (PMI). With an FHA loan, you’ll make an initial payment toward your PMI premium upfront and have a recurring annual fee for as long as you hold the loan.

Your closing costs include prepaid items, such as taxes and insurance escrow deposits, flood insurance, real estate taxes, or per diem interest. Lender fees are pretty standard. It can vary by lender, but it usually includes:

• Origination fee
• Underwriting fee
• Document preparation fee

You can also pay title insurance and fees for a notary, appraisal, and recording.

As you might imagine, these can add up. Your closing costs can vary between 3% to 6% of the loan amount. You could ask the seller to pitch in for the fees. This way, you’ll lower the amount from your pocket.

9. Begin The Application Process

Now that you know the steps to get an FHA loan, it’s time to apply! It’s best to complete an application even before you find a home – that way, you’ll know how much home you can afford.

It also gets your foot in the door faster with sellers and real estate agents. If you already found a home, that’s okay, too. You may need to provide your income and asset documentation (W-2 and bank statements) and information about the house you want to buy along with your application.  

Where Can You Get A Good Rate On an FHA Loan?

Getting a good rate is the name of the game when it comes to buying a house with an FHA home loan. It also gets your foot in the door faster with sellers and real estate agents.

We believe the loan process should be the easiest part of buying a home. A good mortgage broker will help you understand your options, how to qualify, and get you on the path to an FHA home loan. Your home is one of the largest investments of your lifetime, and we'd be honored to help you achieve your dream!