Countless articles have been written about the steps to buying a home with an FHA loan. While many of them do a good job covering the basic steps in the purchasing process, they often start too far into the process. They skip the preliminary steps that occur (or should occur) before you even submit a loan application.
This article addresses the first three steps you should take when buying a home with an FHA-insured mortgage loan.
Why focus on the preliminary steps? Why not skip ahead to the application process? Because it is in these early stages where first-time home buyers make most of their mistakes — mistakes that end up costing them down the road.
For example, many people skip the budgeting process entirely (see #2 below), which sets them up for failure later on. If you start with the three FHA steps below, you’ll have a greater chance of success.
First Steps to Buying a Home With an FHA Loan
First-time buyers are often surprised by the complex nature of mortgage lending. They don’t realize how many different options there are when it comes to home loans. They don’t have their budgeting squared away. If you follow the three FHA home-buying steps listed below, you will avoid such unpleasant surprises. More importantly, you will have purchased a home within your means, and that means fewer financial problems down the road.
Here are the first three steps we recommend, when buying a home with an FHA loan:
1. Choose Between Fixed vs. Adjustable
This is one of the first choices you’ll have to make when you apply for financing. You’ll have to decide whether you want to use a fixed-rate loan that carries the same interest rate for “life,” or an adjustable product that changes over time. FHA loans come in both varieties.
Start by researching the differences between these two products. Learn the pros and cons of fixed versus adjustable mortgages. Here are the pros and cons in a nutshell:
- A fixed-rate FHA loan has the same interest rate for the entire repayment term. This means your monthly payments will stay the same as well, regardless of what the economy does. Predictability is the number-one benefit of going fixed.
- An adjustable-rate loan, on the other hand, has an interest rate that changes or adjusts over time. These products typically start off with a fixed rate for the first few years, after which the rate starts to adjust annually. The benefit here is that you’ll likely qualify for a lower mortgage rate during the initial phase (compared to a standard fixed loan). The downside is that your monthly payments could rise over time.
Take some time to learn the pros and cons of these products. It’s one of the most important steps in the FHA home buying process.
2. Establish Your Housing Budget
Pop quiz. How much can you afford to spend on a mortgage payment each month, after covering all of your other monthly expenses? If you don’t have a number in mind, you’re not ready to talk to lenders. This is another crucial, but often overlooked, step in the FHA process.
Believe it or not, it’s possible to get approved for a home loan that’s too big for you. It happens all the time. As a borrower, you need to understand that the mortgage lender is not your financial advisor. It’s not their job to tell you where your financial comfort zone lies. They can only tell you how much you qualify for, based on their lending guidelines. You need to establish your monthly budget for yourself. It’s an important step to buying a home with an FHA loan — or any type of mortgage for that matter.
Here’s the good news. The math is fairly simple. Just add up all of your monthly non-housing expenses. This includes your car payment, credit card payment, entertainment expenses, savings / IRA contributions — basically, anything you spend money on each month. Subtract this number from your net monthly income (or take-home pay), and you’ll start to zero in on your monthly housing budget.
Do this before you start talking to mortgage lenders. The number-one cause of foreclosure is when people spend too much money on their home purchase, and later cannot afford the monthly payments. This usually happens because they’ve skipped the budgeting process entirely. Don’t make the same mistake.
3. Get Pre-Approved for a Mortgage Loan
Pre-approval is another important step when buying a house with an FHA-insured mortgage loan. This is when the lender reviews your financial situation (debt, assets, income, credit score, etc.) to determine how much they are willing to lend to you.
The lender will also give you a pre-approval letter you can use when making an offer to buy a house. The seller will be more inclined to accept your offer if you’ve been pre-approved for a loan.
Just remember to put these steps in order. Create a budget for yourself before you start talking to lenders. Do not exceed your monthly spending budget, regardless of the pre-approval amount. It’s a recipe for financial distress.
So there you have them, the first three steps in the FHA home buying process!