10 Steps in the FHA Home Buying Process

The 2024 FHA Loan Handbook

How does the FHA home buying process work? What steps are involved in the process, and how does it differ from a regular mortgage loan?

These are common questions among home buyers who plan to use the FHA loan program. And today, we’re going to address all of these questions in detail. Specifically, we will examine the ten basic steps that usually occur during the FHA home buying process.

10 Steps in the FHA Home Buying Process

The FHA home buying process can vary slightly from one buyer to the next, and for a variety of reasons. But most people who use this program go through certain steps in order to reach the finish line. And that’s what we’re going to talk about today.

Here are the ten basic steps when buying a home with an FHA loan.

Step 1: Establish a basic budget for yourself.

Pop quiz. How much can you afford to pay each month toward your housing-related expenses? How much of a monthly mortgage payment can you handle?

If you don’t know the answer to these questions, you’re not ready to move forward with the FHA home buying process. But don’t worry. You can answer these important questions with some basic math.

For starters, figure out how much you spend each month on all of your non-housing related expenses. This will include things like credit cards, car payments, health insurance, savings account contribution, etc. And don’t forget to factor in groceries and other necessities.

This number doesn’t have to be exact, but the closer you get the better.

Next, subtract the number you came up with above from your net monthly income. This is your take-home pay, what you earn each month after taxes are taken out. By subtracting this number from the top number, you’ll have some idea of what you can put toward your monthly housing expense.

This is an important first step in the FHA home buying process. It can prevent you from suffering financial hardship down the road.

And remember, you don’t want to put all of your “leftover” money toward your housing costs. That’s usually a bad idea. As a general rule, it’s best to put no more than 35% of your income toward your monthly housing costs. A lot of financial planners recommend an even lower figure, such as 28%.

That’s up to you. The point is, you have to start the FHA home buying process with some idea of how much you can afford to pay each month.

Step 2: Check your credit scores.

In order to be eligible for the FHA loan program, home buyers must have a credit score of at least 500. If you want to take advantage of the 3.5% down payment option, you will need a score of 580 or higher.

Those are the official credit score requirements for an FHA loan. Just know that individual mortgage lenders can establish their own requirements, and they might set the bar higher than those official numbers.

Before you start talking to mortgage lenders or moving forward with the FHA home buying process, you want to know where you stand in terms of your credit score. This can affect your ability to qualify for an FHA loan, and also determines the interest rate you receive from the bank or mortgage company.

Step 3: Review the FHA limits for your county.

This is another key step in the FHA home buying process, because it affects your purchasing power.

Like other mortgage programs, FHA loans have a certain limit or maximum size. These limits vary by county because they are partly based on median home prices. They can also be changed from one year to the next, so you have to make sure you’re looking at the current numbers.

In 2021, FHA loan limits range from $356,362 to $822,375. Counties with higher prices tend to have higher loan limits. There are even higher limits for places like Alaska, Hawaii and Guam.

You can find the limits for your county with a quick Google search. Again, make sure you are looking at the numbers for the current calendar year.

Now that you have a budget in mind and have reviewed your county’s loan limits, you’re ready to move on to the more proactive steps in the FHA home buying process. For starters, you can start looking for a lender.

Step 4: Find an FHA-approved lender.

Before you can apply for an FHA loan, you have to find a mortgage lender that participates in the program. Fortunately, this is fairly easy to do.

All of the major mortgage companies offer FHA loans. The same is true for a lot of local and regional banks and lenders. Some companies even specialize in government-backed mortgage programs FHA.

There are several ways to find an FHA mortgage lender:

  • You can use the lookup tool on the Department of Housing and Urban Development website.
  • You could do a Google search for your city or state.
  • You could use an online marketplace like the Zillow mortgage marketplace to review FHA lenders.
  • You could also put a call out through your social media networks, asking for recommendations (ideal).

Step 5: Get pre-approved for a loan.

Mortgage pre-approval is usually the next step in the FHA home buying process. It works like a kind of screening process. The mortgage lender will review your financial situation — particularly your income, assets and recurring debts — to decide if you are qualified for an FHA loan.

They’ll also determine how much you are able to borrow, based on the loan limits mentioned earlier and your individual qualifications as a borrower.

Pre-approval is an important step in the FHA home buying process because it allows you to shop for a home that falls within a specific price range. If you don’t get pre-approved, you won’t have any idea how much you can actually afford to buy. You might end up wasting valuable time looking at homes that are outside your financing range.

Putting mortgage pre-approval before house hunting will make you a more efficient home buyer and increase your chance of success.

Step 6: Start shopping for a home.

This is where the FHA home buying process starts to get fun.

You’ve got a budget in mind. You’ve reviewed the loan limits for the county where you want to buy. You’ve found a mortgage lender and gotten pre-approved for a specific amount.

Now you’re ready to hit the ground running. You can go out and shop for a home that falls within your price range, with the confidence that you can actually afford to buy it. (There’s a reason the steps are arranged this way.)

This part of the FHA home buying process works the same as it would if you were using a regular or conventional mortgage loan.

We recommend finding an experienced real estate agent to help you through the house hunting process, but that’s up to you. There is no law that requires you to use an agent when buying a home. But an agent can help you avoid costly mistakes and make a smart offer based on current market conditions.

Also, keep in mind that the home you wish to purchase must be reviewed by an FHA-approved home appraiser. We will talk more about that in step #8 below.

Step 7: Make an offer to buy the house.

The offer and negotiating process is typically the next step in the FHA home buying process. This step occurs once you have found a home that meets your needs and falls within your price range.

Remember, it doesn’t make sense to make an offer on a home that exceeds your mortgage pre-approval amount (unless you’re planning to make up the difference out of your own pocket).

The offer process with an FHA loan works just like it would with any other type of mortgage. But it’s important to realize that some sellers might be reluctant to accept an offer from a buyer using the FHA program.

This program has a certain “stigma” associated with it. Some real estate agents advise their sellers to avoid such offers. The idea is that FHA loans represent a bigger hassle, when compared to conventional mortgages. Some sellers believe that the inspection process is more difficult, or that they will have to make a lot of costly repairs.

In a competitive housing market where multiple offers are common, such negative perceptions might make it harder for you to buy a home with an FHA loan.

These perceptions are not always true. FHA home buyers can be just as strong as those using conventional mortgage products, and the closing success rate is similar for both types. Just be aware of it when house hunting.

This is another area where your real estate agent will prove useful. He or she can advise you on current market trends and how sellers might perceive you, based on your offer and financing.

Related: What sellers should know about FHA

Step 8: Wait for the home appraisal.

From the buyer’s perspective, this is a passive step in the FHA home buying process. There really isn’t much for you to do other than wait. But you should understand this step in the process because it can affect the outcome of your transaction.

Every house purchased with an FHA loan must be appraised by an approved and licensed home appraiser.

The appraiser’s primary job is to determine how much the property is worth in the current market. This prevents people from paying more for a home than it’s truly worth. It also reduces risks for the mortgage lender and the Federal Housing Administration alike.

(We’ve written about the FHA appraisal and inspection process elsewhere on our website.)

Almost every home buyer who uses a mortgage loan has to go through the appraisal process. Most lenders require homes to be appraised before they will finalize and fund a loan. This is true for conventional mortgages as well.

But in the FHA home buying process, it works a little differently. Here, the appraiser is actually looking at two things.

  1. First, he will review the home in relation to recent sales in the area to determine its current market value.
  2. He also has to inspect the home to make sure it meets the minimum property requirements for the FHA loan program.

Step 9: Resolve any underwriting issues.

Mortgage underwriting is one of the latter steps in the FHA home buying process. This is where the mortgage lender’s underwriter reviews all aspects of the loan, property and borrower to make sure they meet internal requirements and those imposed by HUD.

As a home buyer, you might go through the FHA underwriting process in one of several ways. You might “sail through” with no issues whatsoever. Or you might receive some kind of request from the underwriter that has to be resolved before the loan can move forward.

These are often referred to as “conditions.” So you might hear the phrase “conditional approval” during the FHA home buying process. In these scenarios, the underwriter needs additional documentation or explanations in order to give the loan a green light.

Your responsibility, during this step of the FHA home buying process, is to handle any requests from the underwriter in a timely fashion. Doing so can help keep your closing on track and avoid unwanted delays.

Step 10: Attend closing and get your keys!

Hang in there, you’re on the home stretch! You’ve completed almost the entire FHA home buying process and survived the underwriting review. Now you’re ready to move on to closing — and homeownership.

Closing represents the final step in the FHA process, from a home buyer’s perspective. This is where you sign all the documents relating to the transaction and pay whatever closing costs are due.

A few days before closing, you should receive a document known as the Closing Disclosure. This document will include an itemized breakdown of all your closing costs, along with the total amount that’s due.

FHA home buyers usually pay their closing costs in the form of a cashier’s check or wire transfer. You can work out those details with your loan officer and escrow company, before the big day.

Conclusion, and Where to Learn More

So there you have it, a step-by-step walk-through of the FHA home buying process.

  • You start by checking your credit score and establishing a budget for yourself.
  • You review the FHA loan limits for your county and find a mortgage lender authorized to participate in the program.
  • You get pre-approved for a certain mortgage amount and start house hunting.
  • You make an offer based on recent sales data.
  • You wait for the appraisal and inspection to be completed and resolve any underwriting issues that arise.
  • After all that, you’re ready to close the deal and get the keys to your new home.

We’ve included quite a few hyperlinks within this tutorial. You can follow those links to learn more about individual topics like loan limits, home appraisals, etc. You can also click the “learn” link within our main menu to access more tutorials like this one.

Disclaimer: This article provides an in-depth look at the FHA home buying process and the various steps along the way. Every real estate transaction is slightly different, and for a variety of reasons. As a result, your FHA home buying process might differ from the examples outlined above. Similarly, you might encounter additional steps that are not included above.