How to Avoid Common Pitfalls When Applying for an FHA Loan

May 31, 2023 | Mortgage Guides

Navigate Smoothly: How to Avoid Common Pitfalls When Applying for an FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This means the government guarantees it, which allows creditors to offer loans with lower credit scores and down payments.

FHA loans are available to first-time homebuyers and those who have had difficulty qualifying for other loans. They are also available to buy a home in a low-income area or a fixer-upper.

Qualifying for an FHA Loan

To qualify, you must meet the following requirements:

  • Have a credit score of at least 500
  • Have a down payment of at least 3.5%
  • Have a debt-to-income ratio of no more than 36%
  • Be able to afford the monthly mortgage payments

Here are some additional tips for qualifying for an FHA loan:

  • Improve your credit score: if your credit score is below 500, you can enhance it by paying bills on time, keeping your credit utilization low, and disputing errors on your credit report.
  • Save for a down payment: the larger the down payment, the lower the mortgage.
  • Reduce debt: this will lower your debt-to-income ratio.
  • Get pre-approved: This will give you an idea of how much you can afford to borrow and make you a more attractive buyer to sellers.
  • Appraise the property: hire an appraiser for the home you want to purchase to ascertain it meets FHA requirements.

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What Home Qualifies for an FHA Loan?

To qualify, the home must meet certain requirements. First, the property must be the borrower’s primary residence. Second, the home must meet the minimum property standards set by the Federal Housing Administration, which include safety, security, and soundness. This means that the home must be free of hazards such as lead-based paint, have a functioning roof, and be structurally sound. In addition, the property must have adequate living space and access to utilities.

The FHA Loan Process

  • Get pre-approved.

This will give you an idea of how much you can afford to borrow and what the payments will be. To get pre-approved, you will need to provide information about your income, assets, and debts.

  • Find a home.

Once you are pre-approved, start looking for an eligible home. Then, make an offer. If accepted, you will sign a purchase agreement.

  • Apply for an FHA loan.

Once you have signed a purchase agreement, you can apply for an FHA loan. The lender will request information about the property, as well as your financial information.

  • Close on the loan.

Once your application is approved, you will close on the loan. This is when you sign all the final paperwork and take ownership.

Getting Approved for an FHA loan

  • Make sure you have good credit.
  • Have a stable income.
  • Have a down payment of at least 3.5%.
  • Provide the lender with all of the necessary documentation.

Please contact your lender or a mortgage broker should you have questions about the FHA loan process.

The Application

The following documents will be required:

    • Proof of income
    • Proof of assets
    • Proof of residency
    • W-2 forms
    • Tax returns
    • Bank statements
    • Pay stubs
    • Recent utility bills
    • Appraisal report
    • Property disclosure statement
    • Mortgage application
  1. Complete the application: The lender will provide a mortgage application. Answer all of the questions to the best of your knowledge.
  2. Get pre-approved: The lender will determine whether you qualify. If approved, you will receive a confirmation.
  3. Find a home: Once you have been pre-approved, you can start looking for a home, and then make an offer.
  4. Close on the loan: If your offer is accepted, this is when you sign the paperwork and take ownership.

Here is some advice for preparing your FHA loan application:

  • Start early: The process of getting an FHA loan can take several weeks.
  • Get organized: Gather all of the required documents in advance of the deadline.
  • Be accurate: Answer all of the questions on the application truthfully.
  • Be prepared: to provide additional information, such as proof of insurance or a home inspection report.
  • Be patient: The process of getting an FHA loan can be tough.

Documenting Finances

One tip to make organizing easier is to create folders for receipts, bank statements, and bills. Label each folder with the date range and type of document. Make sure the documents are accurate, up-to-date, and organized in a logical way. 

Another helpful tip is to keep a spreadsheet or use a budgeting app to track your spending. This way, you can see where your money is going and make adjustments if needed. Also, be prepared to explain discrepancies. Keep your documents in a safe and secure place, such as a locked filing cabinet or password-protected cloud storage. 

Contact your lender if you have questions about documenting your finances. 

Common Mistakes

  • Not understanding the requirements: FHA loans have terms, such as a minimum down payment of 3.5% and a credit score of at least 580. 
  • Not having the requested documentation: Provide all necessary documentation, such as pay stubs, tax returns, and bank statements, and have it ready before applying.
  • Not searching for the best interest rate: FHA loan interest rates vary. Compare rates before choosing a lender.
  • Not making a down payment: While you can get an FHA loan with a down payment of as little as 3.5%, put down more if possible. This lowers the mortgage and interest.
  • Not getting pre-approved: This will give you an idea of how much you can afford and make you a more attractive buyer.
  • Not being prepared for closing costs: In addition to the down payment, you need to pay closing costs, which can range from 2-5% of the purchase price. 
  • Not understanding the terms of the loan: Before signing on the dotted line, review all the terms, including the interest rate, the payment, and the length of the loan.

Mortgage Insurance

FHA loan mortgage insurance is an insurance that protects lenders in case a borrower defaults. It is required for all mortgages insured by the Federal Housing Administration (FHA). The cost of FHA mortgage insurance is paid as part of the borrower’s mortgage.

There are two FHA mortgage insurance: 

Upfront MIP

A one-time fee equal to 1.75% of the loan. 

Annual MIP 

This equals 0.85% of the loan. The annual MIP is required, but it can be canceled once 80% of the original amount has been paid.

FHA mortgage insurance can be a good option for borrowers with lower credit scores or a higher debt-to-income ratio. It can also be prudent for borrowers who want to buy a home with a lower down payment.

To learn more about FHA loan mortgage insurance, you can visit the Department of Housing and Urban Development (HUD).

Benefits of Applying for an FHA Loan

FHA loans are great for first-time homebuyers and those with low credit scores. Below are some of the benefits of applying for an FHA :

  • Lower down payment: FHA loans require a down payment of only 3.5%, which is lower than the 5% down payment required for most conventional loans.
  • Flexible credit score requirements: FHA loans have more lenient credit score requirements than conventional loans, so you may be able to qualify even if your credit score is not perfect.
  • No prepayment penalties: You can pay off your FHA loan early without any prepayment penalties, which can save you money in interest over the life of the loan.
  • FHA mortgage insurance is less expensive than private mortgage insurance (PMI): FHA mortgage insurance (MIP) is required on all FHA loans, but it is generally less expensive than PMI.
  • FHA loans are available for a variety of properties: FHA loans can be used to purchase single-family homes, townhouses, condominiums, and even manufactured homes.

Conclusion

With its lower down payment requirements, more flexible credit score standards, and fixed-rate options, applying for an FHA loan could achieve your dream of homeownership. Of course, due diligence and researching creditors are prudent. If you are thinking about buying a home, talk to a professional mortgage lender. With careful planning, you can qualify for an FHA loan and become a new homeowner.

To learn more about your FHA home loan options, reach out to Wesley Mortgage today! Our team of expert loan officers can help with all of your homeownership needs. Call today or click the link below to get started!

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