Are you planning to use an FHA loan to buy a house? If so, it’s probably a good idea to get pre-approved by a lender before you start house hunting. It will help you identify your price range, and will make sellers more inclined to accept your offer.
This article explains how the FHA loan pre-approval process works, and why it’s worth pursuing in the first place.
But first, let’s start with a basic definition:
Pre-approval is when the mortgage lender evaluates your financial situation to determine whether or not you are qualified for a loan. They also do it to determine how much money they are willing to lend you.
You can get pre-approved for any type of mortgage loan. But in this article, we will focus on the FHA pre-approval process in particular.
How FHA Mortgage Pre-Approval Works
So, how does the pre-approval process work? What does the lender look at when you apply for an FHA loan? And what kinds of documents do you need to provide?
Let’s start with the timing. This process has a “pre” attached to it, because it happens before you’ve found a home. It essentially paves the way for the house hunting process.
Later on, when you’ve actually found a home and made an offer to buy it, you’ll go back to your lender for the final approval. So you can think of it as a two-part approval process.
When you get pre-approved for an FHA loan, the lender will examine every aspect of your financial situation. This includes (but is not limited to) the following:
- Credit: They will check your credit score to see if you meet their minimum guidelines. For an FHA loan, the official credit score cutoff is 500. But some lenders require a 600 or higher.
- Earnings: Income verification is another important part of the FHA pre-approval process. Here, the lender wants to know how much money you earn each month. They can learn this by looking at your tax returns for the last couple of years, as well as your pay stubs for the last few months. It’s not enough to say how much you earn. The lender will want to see proof of income when you get pre-approved for an FHA loan.
- Debt: Your income is important by itself. But the lender will also compare your income to the amount of debt you currently have. This is referred to as your debt-to-income (DTI) ratio. It’s a comparison between the amount of money you make each month, and the amount you spend to cover your various debts. A lower DTI is better. If you’ll end up spending more than 45% of your income on your monthly debts (including the mortgage payment), you might have trouble getting approved for a loan. But that number is not set in stone.
- Assets: During the FHA pre-approval process, the lender will also review your financial assets. This includes a savings account, 401K, stock dividends, etc. They want to know how much money you have at your disposal. You’ll need sufficient funds in your savings account to cover the down payment and closing costs, at a minimum. Some lenders may have additional cash-reserve requirements as well. It varies.
Commonly Requested Documents
We briefly mentioned some of the documents you’ll need to get pre-approved for an FHA loan. Here’s a more complete list. At some point during this process, you will probably be asked to provide the following documents:
- Social Security card
- W-2 statements and tax returns for the last two years
- Pay stubs for the last two months (showing year-to-date earnings)
- Bank statements for the last two months (or more)
- Employment verification letter
- Divorce decree if applicable
- Documents relating to your other assets
Note: This is a short list of the most commonly requested items. Your lender might ask for additional documents to complete the FHA pre-approval process.
After the lender reviews all of this information, they will tell you two things. First, you’ll find out if you qualify for a mortgage loan based on your current financial situation. You’ll also find out how much they are willing to lend to you. This and other information will be presented to you in a letter. This is known as the FHA pre-approval letter.
Just understand that this is not a guarantee of financing. Things can still go wrong after the home loan pre-approval. As a borrower, your goal is to stay qualified, all the way through to closing.
Getting Pre-Approved: Frequently Asked Questions
We receive a lot of questions from home buyers relating to the FHA pre-approval process. Below, we’ve compiled some of the most frequently asked questions on this subject:
Is pre-approval the same as pre-qualification?
These terms are sometimes used interchangeably. But from a mortgage lender’s perspective, they are two different things.
Generally speaking, an FHA “pre-qualification” is not as helpful as pre-approval. A lender can pre-qualify you for a loan based solely on what you tell them. But there is very little verification during that process.
The FHA pre-approval goes further by verifying and scrutinizing your finances. Because of this, the lender can give you a more accurate picture of your borrowing power. They’ll also give you a letter that shows you’ve been pre-approved for an FHA loan. This letter will make sellers more inclined to accept your offer, because it shows you’ve been screened by a lender.
How long does the FHA pre-approval process take?
The process can vary slightly from one mortgage lender to the next, for a number of reasons. The lender’s current workload, along with the loan officer’s skill and efficiency, will determine how long it takes to get an FHA pre-approval completed.
In most cases, the process can be completed in one to three business days. As a borrower, you can expedite things by providing all requested documents in a timely fashion.
How long is the pre-approval good for, or valid?
When you get pre-approved for an FHA loan (or any other type of mortgage for that matter), the letter will likely have an expiration date assigned to it. Pre-approval letters are typically valid for 60 to 90 days. But again, this can vary from one mortgage company to the next.
There’s usually a statement near the bottom that says how long it will remain valid. For instance, many letters state: “This pre-approval expires 90 days from issuance.” Or it might state something along the lines of: “This letter will remain valid for a closing date as late as June 1, 2019.”
While the language can vary, nearly all of these letters have some kind of expiration date.
What does the pre-approval letter actually say?
While they can vary from one lender to the next, FHA pre-approval letters are somewhat standardized. Most of them contain the same basic information.
They typically include: the amount you’ve been pre-approved for, the required down payment, and a list of conditions that must be met in order to close on the loan.
Common “conditions” listed in an FHA pre-approval letter include: (1) a valid sales contract, (2) an acceptable appraisal, and (3) underwriter approval. These conditions and requirements can vary from one lender to the next, so the letters themselves can vary as well.
Does an FHA mortgage pre-approval guarantee I’ll get financing?
No. As mentioned earlier, getting pre-approved for a home loan does not actually guarantee that you’ll receive financing / funding. It moves you a step closer to that goal. But there are still certain conditions that must be met along the way.
The FHA pre-approval process is basically a form of preliminary screening. It’s the lender’s way of saying: “Based on our initial findings, you are a good candidate for a loan and qualify for financing up to X dollars.” But you still need to go through a home appraisal and underwriting process. And a lot can happen during those stages.
So that covers the pre-approval process for FHA-insured mortgage loans. If you have additional questions about this program, use the search tool at the top of this page. You can also review our article library for related information.