Are you planning to use an FHA-insured home loan to buy a house? If so, you probably have questions about the FHA approval process, and what it takes to get approved these days. This tutorial breaks the entire process down into five key stages. While the individual steps can (and usually do) vary from one borrower to the next, it usually goes something like this.
FHA Mortgage Approval Process, by the Numbers
The path to an FHA approval can be long and winding. Some borrowers sail through it with no issues whatsoever, while others encounter one obstacle after another.
In most cases, the FHA loan-approval process includes the following five steps: Pre-approval, application, property appraisal, underwriting, and final mortgage approval. Here’s what you should know about these five stages, as a borrower:
1. Pre-approval Process
This step is optional but highly recommended. Pre-approval is when the lender reviews your financial situation to determine (A) if you’re qualified for an FHA loan, and (B) how much they are willing to lend to you. It has a “pre” prefix because it happens before you start house hunting, and before the final loan approval.
The idea is to have something in writing that shows you’ve been pre-screened by a mortgage lender. You would then present the pre-approval letter to homeowners / sellers, when making an offer to buy a house. They’ll be more likely to accept your offer if it comes with such a letter.
Once you’ve been pre-approved, you’ll move one step further into the FHA approval process. You can then start shopping for a home that falls within your price range.
2. Standard Loan Application
At some point, you will be asked to fill out a Uniform Residential Loan Application (Fannie Mae form 1003). This can occur at various stages of the process, but it usually happens after you have found a house and made an offer to buy it. The application asks for information about the type of loan you are seeking, as well as the property address. That’s why it usually gets filled out after you’ve found a home.
The lender might have you complete the application form earlier in the FHA approval process, perhaps during the pre-approval stage mentioned above. In this case, you would leave the property address blank, since you haven’t found a house yet.
The loan application will take some time to complete. It asks for a lot of information regarding your current and previous employers, income sources and amounts, housing expenses, other recurring debts, etc. There are no shortcuts here. It’s a standard part of the FHA process. Complete the application truthfully and to the best of your knowledge.
You might have to pay a mortgage application fee at this point as well. Or the lender might include the fee within your closing costs, which you will pay later on when you actually close the deal. It varies. So be sure to ask about this fee in advance.
3. Property Appraisal
When you use an FHA loan to buy a house (or any type of mortgage for that matter), the lender will want to know the true market value of the property. This is where the home appraisal comes into the picture. The lender will hire a licensed appraiser to evaluate the property and estimate what it’s worth in the current market. The appraiser will base the assessment on recent sales prices for similar homes, as well as the condition and unique features of the property in question.
Basically, the lender wants to know the potential resale value of the home, in case they have to foreclose and resell the property down the road. They are investing more than you are — so they want to know the value of their investment.
You might be wondering how this relates to the FHA approval process. Here’s how:
- If the home appraises for the amount you have agreed to pay (or more), your loan will probably move forward to the next stage explained below.
- But if the appraiser says it is worth less than what you’ve agreed to pay, you’ll hit an obstacle. You can learn more about low appraisals through the link below.
4. Underwriting and Documentation Review
Underwriting is one of the most important, and nerve-wracking, steps in the FHA approval process. It’s also one of the most “mysterious” steps for first-time home buyers. That’s because buyers usually don’t deal with the underwriter directly. They usually deal with the loan officer or processor, as their primary point of contact.
The mortgage lender’s underwriter will analyze your paperwork, income, credit score, and other factors to determine if the loan is sound. If he/she finds minor issues, you may have to provide a letter of explanation (LOE) or take other actions to resolve the issue. Don’t panic. These conditions are a fairly common occurrence. Just provide whatever is asked of you, so you can put the ball back in their court.
If the underwriter finds a serious issue that renders the loan unsound, it might be the end of the line. Thus, the underwriter (or the underwriting department) has the power to make or break the deal. This is why home buyers tend to get nervous when their files move into the underwriting stage of the FHA approval process. It’s the moment of truth, so to speak.
If you’re lucky, you’ll sail through this stage with no issues whatsoever, or only minor conditions. Once you get past this step, there is a very good chance you’ll be approved for the loan.
5. FHA Loan Approval
Once the underwriter is satisfied that you meet all of the lender’s guidelines, as well as the Federal Housing Administration’s guidelines, you will be “clear to close.” This means you can move forward to the closing process and receive financing.
At the closing (also known as “settlement” in some states), you will sign a slew of paperwork and pay all remaining fees and costs. These are collectively referred to as your closing costs. Ownership of the property will be transferred from the seller to the buyer. This is also when you get the keys to your new home!
Disclaimer: This article provides a general overview of the FHA mortgage approval process. Your experience could differ from the scenario outlined above. Every lending situation is different because every borrower is different. Additionally, some preliminary steps were excluded for the sake of brevity (such as the budgeting process). Despite these omissions and variables, this article gives you a general idea of how the FHA approval process works. To learn more about this topic, download our free handbook or use the search tool provided at the top of this page.