How to Get an FHA Loan

How to Apply for an FHA Loan

To apply for an FHA loan, follow these steps.

1. Understand FHA Loan Requirements

Qualifying for an FHA loan requires:

• A credit score of at least 500: Borrowers with a 10% down payment may qualify for an FHA loan with credit scores as low as 500. Those with scores of 580 or more can make the minimum down payment of 3.5%. Check your credit score to see where you stand. It's also a good idea to look over your credit report with each of the three major consumer credit bureaus (Experian, TransUnion and Equifax). You can do this for free at AnnualCreditReport.com. Improving your credit score can boost your odds of FHA loan approval.
• A minimum down payment of 3.5%: The minimum down payment is open to those with a credit score of 580 and up. If your credit score is between 500 and 579, you must put down 10%.
• Debt-to-income ratio (DTI) not exceeding 43%: Your DTI ratio measures how much of your pretax monthly income goes to pay debt. If your monthly income is $5,000 and your monthly debt payments total $2,000, your DTI is 40%. However, you can be approved for an FHA loan with a DTI over 43% if other factors, such as excellent credit or high income, compensate for your high DTI.
• Mortgage insurance premium: FHA loans require mortgage insurance, paid in two parts. A mortgage insurance premium equivalent to 1.75% of the loan amount is due at closing and can be rolled into your loan. An annual mortgage insurance premium equal to 0.45% to 1.05% of the loan amount is added to your mortgage payments. Unless you make a down payment of 10% or more, you'll pay mortgage insurance for the life of the loan (unless you refinance).

Some lenders have additional conditions for FHA loans. Check with each lender to understand their requirements.

2. Check Your Eligibility

In addition to meeting the requirements above, you'll need:

• A valid Social Security number: Lenders use your Social Security number to help confirm your identity.
• Verifiable income: Lenders verify your income with pay stubs and tax returns and may want proof of assets, such as statements for your savings account or investment accounts.
• No recent foreclosures: You can't get an FHA loan if you've had a foreclosure within the past three years.

Still not sure you qualify for an FHA loan? Contact a housing counseling agency approved by the Department of Housing and Urban Development (HUD) for help.

3. Find FHA-Approved Lenders

FHA lenders can set their own interest rates; some offer better terms than others. To find the lowest interest rates and fees, compare offers from several lenders. Use the HUD lender directory to find FHA-approved lenders and get their eligibility criteria.

4. Gather Your Documents

Mortgage preapproval can reveal the loan amount, terms and interest rates a lender is likely to offer you. The process is the same as applying for a mortgage. Generally, you'll need the following information and documents (check with lenders for specifics):

• Income verification (pay stubs, tax returns, W-2 forms, bank statements)
• Proof of assets (savings, investment accounts, real estate)
• Personal identification (Social Security number, driver's license or state ID card, passport)
• Employment history
• Debts (outstanding loans, credit card balances)

5. Submit an Application

Apply to more than one lender to see which offers the best loan terms. (There may be an application fee.) Lenders will request your approval for a credit check. Since this credit check is a hard inquiry and can cause a small, temporary dip in your credit score, limit your mortgage preapproval applications to a span of a few weeks. Credit score calculations combine credit checks made in a short time period, minimizing any negative impact on your credit score.

6. Review Your Loan Offers and Choose Your Loan

You should get preapproval letters from lenders within a day or so. Letters will state the loan type, amount and interest rate the lender is prepared to offer based on the information you submitted. Preapprovals are usually valid for 60 to 90 days. Interest rates and other terms may be locked in for that period or subject to change.

Getting a mortgage after preapproval may require submitting the most current information (such as your latest bank statements). If your financial situation has changed, your loan terms may too.

How to Decide Whether an FHA Loan Is the Right Choice

Not sure you should get an FHA loan? Consider the pros and cons.

Pros of an FHA Loan

• You don't need a high credit score. While conventional mortgages usually require a credit score of 620 or more, FHA loans are open to borrowers with credit scores as low as 500.
• You don't need a big down payment. If your credit score is 580 or more, you could qualify to put down just 3.5%.
• Interest rates are competitive. As of July 29, 2023, the average annual percentage rate (APR) for a conventional 30-year, fixed-rate mortgage is 6.71%. While FHA loan APRs are generally 1.5 to 2 percentage points higher than conventional mortgage APRs, they're usually several points lower than subprime mortgage APRs. Borrowers with FICO Scores of 580 to 669 may be considered subprime, making an FHA loan a more affordable choice.
• You can roll closing costs into the loan. Mortgage closing costs usually range from 2% to 5% of the home's price. With the median U.S. home price reaching $445,000 in June 2023, according to Realtor.com, that's $8,900 to $22,250 in closing costs on top of your down payment. FHA loans let you roll closing costs into the loan, keeping more money in your pocket.

Cons of an FHA Loan

• You'll pay mortgage insurance. Unless you make at least a 10% down payment, FHA mortgage insurance could last the life of your loan. This means higher closing costs in the short term and higher monthly payments in the long term. With a down payment smaller than 10%, the only way to rid yourself of mortgage insurance is to refinance your mortgage.
• It has stringent appraisal standards. The home you're purchasing must be your primary residence and must meet FHA appraisal requirements. For example, condominiums may not qualify for FHA loans.
• There are limits on how much you can borrow. For 2023, FHA limits loans to $472,030 for a single-family home. In comparison, conforming conventional loans let you borrow up to $726,000. (Both types of loans let you borrow up to $1,089,300 in the highest-cost regions of the U.S.)

The Bottom Line

Checking your credit score at least three months before applying for an FHA loan can help prevent surprises. If your score isn't where you want it, paying bills on time, paying down debt and reducing your credit utilization ratio can help improve your score—and your odds of getting a loan.