Everything You’ve Ever Wanted to Know About the FHA Loan Process

FHA loans

So you want to buy a house, and you’ve been looking into FHA loans as the best option for your current financial situation. FHA loans are backed by the Federal Housing Administration. In most cases, home buyers interested in obtaining an FHA loan for their new home need to have a minimum credit score of 500, as well as 3.5% down. If you’re still working on improving your credit score or have limited savings, an FHA loan is a great option to get you the house you want – when you want it. 

Here’s everything you need to know about FHA loans and who benefits from them. 

What is an FHA Loan?

So what exactly is an FHA loan? As mentioned, it’s a loan backed by the Federal Housing Administration that is usually more beneficial to people who are in the process of improving their credit score or have limited savings. The FHA provides lenders insurance on the loan in the case there’s a default on payments. Because of this, the FHA also provides more favorable terms to the people taking out the loan when they probably wouldn’t qualify otherwise. Since this is a special kind of loan, only a lender who is FHA-qualified can handle this kind of loan.

What is the FHA?

FHA is short for ‘Federal Housing Administration,’ which is part of the U.S. Department of Housing and Urban Development. It was created as part of the National Housing Act of 1934 to help prevent foreclosures and make owning a house more affordable. Today, the FHA provides insurance to loans on about 8 million single-family homes.

How Do You Qualify for an FHA Loan?

There are a few different things that are taken into consideration when qualifying for an FHA loan. First, you need to have a minimum credit score of 500. Please keep in mind that the higher your credit score is (for example, between 500 and 579), the larger of a down payment you’ll need to make. In most cases, this is about 10%. Furthermore, this minimum credit score may vary from lender to lender, so this is a great question to ask your mortgage lender upfront. 

Second, the property you’re interested in will have to meet FHA requirements. This means that the home will need to have both an appraisal and home inspection to make sure it’s safe and in livable condition. If the property does not live up to these FHA standards, you can pretty much guarantee that your loan won’t be approved. 

Did COVID-19 Change FHA Loans? 

Unfortunately, yes. Even though the minimum eligibility requirements haven’t been officially changed by the FHA, many lenders are now requiring applicants to have a minimum credit score of 620 to qualify for an FHA loan. This is because of the current recession and effects of the COVID-19 pandemic. 

What Kinds of FHA Loans are There?

Overall, there are five kinds of FHA loans. Each loan has its benefits and limitations to consider before choosing the one that’s right for you.

  • Basic Home Mortgage 203(b) – This loan can be used to purchase or refinance a primary residence with a low minimum down payment. The downside to this is that it can’t be used on a house that needs more than $5,000 in repairs.
  • Construction Loan – This can be used to buy land and finance the building of a new home. The downside here is that this kind of loan is a lot more difficult to obtain and it can be very time-consuming to do so.
  • Energy-Efficient Mortgage – This kind of loan can be used to improve your home to make it more energy-efficient. To qualify, your home has to be professionally assessed and the improvements have to be deemed cost-effective.
  • 203(k) Rehab Mortgage – This loan is perfect if you’re looking to get a fixer-upper. The limitations on this one are that the repairs have to exceed $5,000 but can’t take longer than 6 months to repair and must be repaired by a qualified professional.
  • Title 1 Property Improvement Loan – This loan can be used to supplement a 203(k) loan. With this, you can only borrow up to $25,000 on a single-family home, $25,090 on a mobile home with land, and $60,000 on a multifamily home.

FHA loan

The Differences Between a Conventional Loan and an FHA Loan

There are a few differences between a conventional loan and an FHA loan that are worth mentioning:

  • FHA has more relaxed rules on down payment money being gifted to you from family, charitable organizations, or employers.
  • FHA loans might require closing costs you normally wouldn’t see with conventional loans.
  • You can get approved for an FHA loan with lower credit scores than a conventional loan. This might also mean lower monthly mortgage insurance payments.

Are There Limits on FHA Loans?

The simple answer to that question is yes. There are limits to FHA loans and those limits vary depending on what county you’re in. In 2022, the FHA loan limits range between $420,860 and $970,800.

What You Need to Apply

To apply for an FHA loan, you’ll need the following: 

  • 30 days’ worth of bank statements and pay stubs
  • Social Security number
  • Proof of U.S. citizenship

However, keep in mind this is not an exhaustive list and your lender may ask for additional documentation. 

Do You Want to Learn More about FHA Loans? Call City Creek Mortgage for More Information

Buying a home is already complex. But it can become even more complex when you throw in an FHA loan and all the different eligibility requirements that go along with it. Learn more about this kind of mortgage loan to see if it’s the right fit for you. Contact the team at City Creek Mortgage for help. 

Call us today at 801-501-7950 to speak with one of our trained and knowledgeable mortgage lender advisors. 

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