Apply for an FHA Loan in 2024: Step-by-step guide

Essential tips to ace your FHA loan application

When you apply for an FHA loan, you’ll discover it’s a fantastic option for buying a house without a hefty down payment or flawless credit score.

Almost every private lender offers these government-backed mortgages. This wide availability means you can effortlessly apply and seek the most competitive rates.

Whether you prefer beginning your application online or meeting face-to-face with a loan officer for tailored advice, the choice is yours, ensuring a tailored mortgage experience.

In this article (Skip to...) 

• FHA loan application process
• FHA approval requirements
• Documentation needed
• FHA loan limits
• FHA lenders
• FHA loan refinancing
• FAQ

What is an FHA loan?

The FHA loan is a popular mortgage program backed by the Federal Housing Administration. It caters especially to those who might find it challenging to qualify for a traditional mortgage by offering lenient credit requirements and a low down payment.

While the FHA doesn’t directly lend money to borrowers, it insures the loans made by private lenders, thereby reducing the risk for the lender and allowing them to provide more favorable terms. This helps ensure that a wider range of people can become homeowners, filling in the gaps in the real estate market.

Whether you’re a first-time home buyer or someone looking for a more flexible lending option, the FHA loan might be the solution for you.

8 steps to apply for an FHA loan

If you’re wondering how to apply for an FHA loan, here’s the lowdown. Although the Federal Housing Administration, a division of the Department of Housing and Urban Development (HUD), insures these loans, private lenders actually issue them.

This government backing allows FHA loans to come with perks like lower down payments, forgiving credit requirements, and competitive rates, making homeownership more accessible to many.

Even though the FHA guarantees this loan program, they don’t provide the funds. That’s where your chosen private lender comes in. Your first step? Picking that FHA-approved lender to start your FHA loan application journey.

1. Find an FHA-approved lender

The first step in applying for a FHA loan is to find a participating lender. Fortunately, most banks, mortgage companies, credit unions, and online lenders are equipped to provide FHA financing. The ideal lender for you will depend on several factors, including your credit score and your preferred method of communication. For example:

• Credit score considerations: Verify that your lender accepts the FHA’s minimum score of 580, though some may require a higher score.
• Communication preferences: If you value face-to-face or phone interactions, a local lender might be your best bet. Alternatively, many lenders offer a streamlined online mortgage process for those who prefer digital communication.

2. Fill out an FHA loan application

After choosing your lender, the next step is the loan application. This process can often be completed online, though some lenders may offer or require phone or email communication with a loan officer.

It’s wise to shop around; mortgage terms and rates can vary significantly. Contacting multiple lenders to compare offers ensures you secure the best possible deal. Aim to get quotes from at least three to five lenders to ensure comprehensive market insight.

Concerned about your credit score? Submit all loan applications within a 45-day period to minimize the impact, as they will count as a single inquiry.

3. Submit your financial and personal documents

Your lender will need certain information to start the application process, including:

• Full name and Social Security Number
• Valid driver’s license or state-approved ID
• Income and employment history
• Property details, including address and purchase price
• Down payment amount

Once you’ve provided this basic information, the lender will request supporting financial documents to verify your income, savings, and debts. Check out the “Documents” section below for a full list of documents you’ll need.

4. Compare Loan Estimates from multiple lenders

After you submit a loan application, the lender must provide a Loan Estimate within three business days.

The Loan Estimate (LE) is a standard form all lenders use. It’s designed to keep the loan process transparent by providing information about a borrower’s estimated interest rate, monthly mortgage payments, and closing costs upfront.

The LE also provides information about the loan type and term, so you know you’re comparing mortgage offers on equal footing. (For instance, an FHA loan with a 15-year term would have much higher payments than one with the same loan amount and a 30-year term.)

Make sure all your loan offers quote the same loan type, loan term, and loan amount. Then compare interest rates, annual percentage rates (APR), and upfront fees to find the best deal.

5. Schedule the required FHA appraisal

Once your loan application is in progress, your lender will arrange for an FHA-approved appraiser to evaluate the property you intend to purchase. This step is crucial as it ensures the property meets the FHA’s minimum property standards and determines its market value.

The appraisal assesses the home’s condition, including safety, security, and structural integrity. Preparing for this step involves understanding that the property must qualify under FHA guidelines just as much as the borrower does. We go over FHA loan property requirements in more detail below.

6. Await loan processing and underwriting

After the appraisal, your loan enters the processing stage where the lender verifies all the information provided in your FHA loan application, including your income, credit history, and the property details.

Following processing, your loan moves to underwriting. During underwriting, an FHA-approved underwriter reviews your application to make a final decision on your loan approval. This stage may require you to provide additional documentation or clarification, so staying responsive and prepared to supply any requested information quickly is important.

7. Close on your FHA loan

The final step in the FHA loan application process is the closing. Once your loan is approved, you’ll receive a closing disclosure outlining the terms of your loan, closing costs, and any other fees associated with your mortgage.

Review this closing document carefully. You’ll then attend the closing meeting to sign the loan documents, finalize the mortgage, and take ownership of your new home.

Preparing for closing involves ensuring you have the necessary funds for your down payment and closing costs and understanding the legal implications of your mortgage documents.

8. Maintaining your FHA Loan and monthly payments

After closing, it’s important to maintain good financial habits to ensure you remain in good standing on your FHA loan. This includes making timely mortgage payments, keeping up with property taxes and homeowner’s insurance, and maintaining your home in good condition.

Consider setting up automatic payments to avoid missing a mortgage payment, and regularly review your loan statements to stay informed about your loan balance and interest payments.

Eligibility: FHA loan requirements for 2024

Applying for an FHA loan is fairly straightforward, but ensuring successful approval requires understanding and meeting specific criteria. The FHA loan program is designed to help more people become homeowners by allowing lower credit scores and smaller down payments than many conventional loans.

Below, we provide detailed insights into key FHA loan requirements, helping you navigate the application process with confidence.

FHA borrower requirements

Credit score

FHA home loans are accessible to a wider range of borrowers due to their flexible credit score requirements. Specifically, you need a minimum FICO score of 500 to qualify. However, to take advantage of the lower 3.5% down payment option, a FICO score of 580 or higher is required.

This is significantly more accommodating compared to conventional mortgages, which typically require a FICO score of at least 620.

Remember, the better your credit score, the more favorable your loan terms will be.

Credit history

Your credit history plays a crucial role in the FHA loan approval process.

• Generally, FHA lenders allow no more than a single 30-day late payment in the past 12 months.
• Additionally, applicants should not have undergone foreclosure in the last three years or filed for bankruptcy recently.

These guidelines are in place to ensure that borrowers have a track record of managing their financial obligations responsibly.

Down payment minimums

One of the most appealing aspects of FHA loans is their low down payment requirement.

• If your credit score is 580 or above, you’re eligible for a minimum down payment of just 3.5%.
• For applicants with credit scores between 500 and 579, a 10% down payment is required.

For individuals without substantial savings, this flexibility makes the home-buying process easier.

Loan-to-value ratio limits

The loan-to-value ratio (LTV) is a critical factor in determining your eligibility for an FHA loan. It compares the loan amount you are seeking with the home’s market value. Lenders use LTV to evaluate the risk associated with the loan.

Your LTV must be 96.5% or lower to qualify for FHA loan approval, which means you need to make a down payment of at least 3.5%.

Closing costs

In addition to the down payment, borrowers are responsible for closing costs. FHA loan lenders and third parties involved in the transaction, like title companies or HOAs, charge these fees for loan origination, underwriting, and more.

Closing costs vary by lender but typically range from 2% to 5% of the loan amount. It’s important to budget for these closing costs upfront, as they are separate from the down payment.

Debt-to-income ratio limits

The debt-to-income ratio (DTI) is another key consideration for FHA loan approval. This ratio measures the portion of your gross monthly income that goes towards paying off debts, such as credit card payments and student loans.

• For an FHA loan, your DTI should generally not exceed 45%.
• However, lenders may allow a higher DTI if you have compensating factors like an excellent credit score or substantial cash reserves.

Moreover, up to 31% of your gross monthly income can be allocated towards your house payment.

By understanding and meeting these FHA loan requirements, you can improve your chances of approval. Remember, each lender may have additional criteria, so it’s beneficial to shop around and compare offers to find the best deal for your situation.

FHA loan property requirements: Which homes qualify?

When applying for an FHA loan, not only do borrower qualifications matter, but the property itself must meet specific standards set by the Federal Housing Administration. These requirements ensure that the property is a safe, secure, and sound investment for the borrower.

Below, we detail the key property requirements that must be satisfied for FHA loan approval.

Property appraisal

An FHA-approved appraiser must conduct a thorough appraisal to assess the value of the property. This appraisal ensures the home meets HUD’s minimum property standards and determines the property’s market value. The appraisal evaluates the physical condition of the home, any necessary repairs, and compliance with local building codes.

Primary residence

The FHA loan program is designed for properties that will be used as the borrower’s primary residence. Investment properties or vacation homes do not qualify. The borrower must intend to occupy the property within 60 days of closing and continue to live there for the majority of the year.

Single-family homes

Single-family homes are the most straightforward property type for FHA financing. These properties must meet all FHA property requirements, including safety, health standards, and structural integrity.

Multi-unit homes

FHA loans can also be used to purchase multi-unit homes, such as duplexes or fourplexes, under certain conditions. The borrower must live in one of the units as their primary residence. The other units can be rented out, which can be an attractive option for borrowers looking to generate rental income.

Like single-family homes, multi-unit properties must pass the FHA appraisal process and meet all health and safety standards.

Second homes and investment property

Second homes do not qualify for FHA loans. The FHA loan program is specifically designed to help borrowers purchase their primary residence. Financing a vacation home or a property that the borrower intends to use as a secondary residence does not meet the program’s eligibility requirements.

Investment properties are also ineligible for FHA loans. The program does not support the purchase of properties that the borrower intends to use solely for rental income and does not plan to occupy as their primary residence.

Other property requirements

Safety and health standards

The property must provide a safe and healthy living environment with functioning heating, electrical, and plumbing systems. It should be free of significant physical deficiencies, lead-based paint hazards, toxic substances, and other health or safety risks. The property must have sound structural integrity, with the foundation, roof, walls, floors, and other components in good condition.

Access and egress

Proper access for pedestrians and vehicles is required, along with safe, accessible egress in emergencies, including appropriate access from streets and emergency exits.

Adequate living space

The home must provide adequate living space, including suitable sleeping areas, a functioning bathroom, and kitchen facilities to accommodate basic living, cooking, and sleeping functions.

Utility services

The property must have independent, safely installed, and operational utility services for water, sewage, electricity, and gas (if applicable). If no public utilities are available, proof of adequate and trustworthy alternative sources is required.

Meeting these property requirements is key for your FHA loan application. Borrowers should work with their lender and real estate agent to ensure the property qualifies for FHA financing.

Documents needed to apply for an FHA loan

When you initially apply for an FHA loan, lenders will ask about your income, savings, debts, and assets.

Once you decide to proceed with the loan, they’ll need proof of the information you provided. That means submitting a variety of financial documents.

You’ll typically be asked to provide the following:

• Tax returns from the past two years
• W2s from the past two years
• Bank statements from the previous 60 days
• Financial statements for other assets (investment accounts and retirement accounts)
• Recent pay stubs
• Proof of other income, such as Social Security or disability income
• Name and address of your employers over the previous two years
• Year-to-date Profit and Loss statement, if you’re self-employed

The lender will also pull your credit score and credit reports. Authorizing a credit check allows the lender to view your credit history and verify your current debt load and minimum monthly payments.

FHA loan limits for 2024

FHA loan limits are the maximum amount that you can borrow under an FHA loan program, and these limits vary by county and are adjusted annually to reflect changes in home prices.

Current FHA loan limits are $ in most areas but reach upwards of $ in high-cost housing markets.

These limits are set to ensure that FHA loans are used for moderate-priced homes and to help maintain the program’s mission of serving low-to-moderate-income borrowers.

FHA loan limit example: Metro areas

In a high-cost metro area like San Francisco, California, FHA loan limits can be significantly higher to accommodate the area’s elevated home prices.

For 2024, the FHA loan limit for a single-family home in San Francisco County is $. This adjustment allows borrowers in high-cost areas to access FHA financing for homes priced above the national average.

FHA loan limit example: Suburban areas

Conversely, in a suburban area with more moderate housing costs, such as Harris County in Houston, Texas, the FHA loan limit for a single-family home might be lower, reflecting the area’s average home prices.

For instance, the FHA loan limit is $ in 2024. This ensures that the FHA loan program serves its purpose of helping families afford homes without encouraging excessive borrowing.

FHA mortgage insurance

All lenders charge FHA mortgage insurance for the life of the loan. In other words, you must pay FHA mortgage insurance until the principal loan balance is paid or you refinance to another type of mortgage, like a conventional loan.

FHA mortgage insurance is designed to protect lenders against losses if a borrower defaults on their mortgage. There are two types of FHA mortgage insurance premiums that borrowers must pay: the Upfront Mortgage Insurance Premium and the Annual Mortgage Insurance Premium, which is paid monthly.

Upfront Mortgage Insurance Premium (UFMIP)

UFMIP is a one-time fee paid at closing and is typically 1.75% of the loan amount. For example, on a $300,000 loan, the UFMIP would be $5,250. This amount can be financed into the mortgage, allowing borrowers to pay it off over the life of the loan rather than upfront.

Annual Mortgage Insurance Premium (MIP)

The annual MIP is paid monthly and varies based on the loan term, loan amount, and initial loan-to-value ratio (LTV). Rates can range from 0.45% to 1.05% of the loan amount per year.

For a 30-year fixed-rate loan of $300,000 and an LTV greater than 95%, the MIP rate might be 0.85%, or $2,125 per year. This equates to an additional $177.08 that is added on top of your monthly mortgage payments.

Types of FHA Loans

When applying for an FHA loan, it’s essential to understand the different types available to choose the best option for your needs. Here are the main types of FHA loans:

• Fixed-rate mortgages are the most common type, offering stable interest rates and predictable monthly payments for the life of the loan.
• Adjustable-rate mortgages (ARMs) have interest rates that can change over time based on market conditions, which may result in lower initial payments but potential increases in the future.
• FHA 203(k) loans are designed for borrowers who want to purchase a home that needs renovations or repairs, allowing them to finance both the purchase and renovation costs in a single loan.
• FHA Energy Efficient Mortgages (EEMs) help borrowers finance energy-saving upgrades to their homes, such as installing solar panels or energy-efficient appliances, by including the costs in the mortgage.
• Home Equity Conversion Mortgages (HECMs)—known as reverse mortgages—allow seniors aged 62 or older to convert their home equity into cash while retaining ownership of their home.

When applying for an FHA loan, discuss your options with your lender to determine which type best suits your financial situation and homeownership goals. Keep in mind that each type has specific requirements and considerations, such as income limits and maximum loan amounts, which may vary by location.

How long does it take to get an FHA loan?

The typical timeline from application to closing with an FHA loan ranges from 30 to 45 days.

During this time, your loan file goes through underwriting. The underwriter takes a closer look at your application and reviews supporting documents to ensure you meet the minimum guidelines for FHA financing.

FHA lenders: Where can I apply for an FHA loan?

The FHA doesn’t offer loans directly, so you’ll need to contact a private lender to apply. Most lenders are FHA-approved, giving you a wide range of options:

• Local banks and credit unions
• National banks
• Online mortgage lenders

To find a suitable FHA lender:

• Get recommendations from friends or family who’ve used an FHA loan
• Check the Better Business Bureau for lender ratings and reviews
• Compare credit requirements, as they vary between lenders:
  • Many allow credit scores as low as 580
  • Some may require a minimum of 600 or higher
  • If your score is on the lower end, shop around more

Regardless of your credit score, it’s essential to find at least three lenders, apply to each one, and compare personalized quotes to find the best FHA mortgage rates and terms, as they can vary significantly from lender to lender.

Pros and cons of FHA loans

FHA loans come with a mix of advantages and disadvantages, making them suitable for some borrowers but not for others. Here’s a breakdown:

Pros

• Lower down payments (as little as 3.5% with a credit score of 580+)
• Lenient credit requirements (scores as low as 500 may qualify with a 10% down payment)
• Higher debt-to-income ratios allowed compared to other loan types
• Loans are assumable under certain conditions

Cons

• Mortgage insurance required (upfront and annual premiums, often for the life of the loan)
• Loan limits vary by county, potentially restricting purchasing power in high-cost areas
• Purchased homes must meet safety, security, and structural standards
• Interest rates may be slightly higher than conventional loans
• Primary residence requirement (not suitable for investment properties)

When deciding whether to apply for an FHA loan, assess your financial situation and home buying goals.

Looking ahead: Refinancing an FHA loan

Looking down the homeownership path, many wonder about the benefits of refinancing their FHA mortgages and whether it’s a suitable choice for them.

The reasons to consider refinancing are numerous, ranging from acquiring a more favorable interest rate to shedding long-term costs. Homeowners certainly have several options when they decide to refinance an existing FHA loan.

Streamline Refinance

Specifically designed for those with an existing FHA loan, a Streamline Refinance provides an efficient route to obtain a lower rate and consequently reduce monthly mortgage payments.

Its advantage lies in its simplicity—the process is faster than a conventional refinance and often requires less documentation, enabling homeowners to capitalize on current market rates with minimal hurdles.

FHA cash-out refinance

An FHA cash-out refinance allows homeowners to access their home’s built-up equity by taking out a new, larger loan and receiving the difference in cash. This method is ideal for those who’ve accumulated significant equity and wish to utilize it for various needs or projects.

Refinancing to a conventional loan

This option is particularly attractive to those wanting to eliminate the annual mortgage insurance premium (MIP) that’s mandated for the duration of most FHA loans. By transitioning to a conventional loan, homeowners can potentially save thousands over the life of the loan.

However, to qualify, one needs to meet specific criteria, like a minimum credit score requirement, and possess at least 20% home equity.

Whatever the motivation, understanding the available FHA refinancing options is essential to making informed financial decisions that enhance long-term homeownership stability and success.

FHA loans vs. conventional loans: Key differences

FHA loans and conventional loans have different eligibility requirements and features. Here are some key differences to consider when deciding between the two:

Credit score requirements

• FHA loans: Minimum credit score of 500 (with 10% down payment) or 580 (with 3.5% down payment)
• Conventional loans: Minimum credit score of 620

Down payment requirements

• FHA loans: As low as 3.5%
• Conventional loans: As low as 3%, but may require private mortgage insurance (PMI)

Mortgage insurance

• FHA loans: Require upfront and annual mortgage insurance premiums (MIP) for the life of the loan in most cases
• Conventional loans: May require PMI for down payments less than 20%, but can be removed once sufficient equity is built

Income requirements and income limits

• FHA loans: Have specific income limits and requirements that vary by location
• Conventional loans: Do not have government-set income limits, but lenders will assess your income and debt-to-income ratio (DTI)

Maximum loan amounts

• FHA loans: Have lower loan limits compared to conventional loans
• Conventional loans: Offer higher loan limits, especially for high-cost areas

When applying for an FHA loan, consider your financial situation, including your credit score, down payment funds, and monthly debt payments. Compare offers from multiple lenders to determine if an FHA loan or conventional loan is the best fit for your needs.

FAQ: How to apply for an FHA loan

Are you ready to apply for an FHA loan?

Applying for an FHA loan is pretty straightforward. Once you’ve chosen the lenders to apply with, their online systems and loan officers will walk you through each step of the process.

Make sure you have all your financial documents on hand to make the application process go as smoothly as possible.

Most importantly, apply with more than one FHA lender. This is the only way to ensure you get the most competitive rate. Remember, even a seemingly tiny rate difference (0.125% or less) can save you thousands of dollars over the life of the loan.

Luckily, many lenders offer online preapproval. So getting mortgage quotes and comparing rates can be relatively quick and painless.