How to Apply for an FHA Loan & Required Information

Last Updated: 8/19/2021
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FHA home loans offer more flexible underwriting for borrowers who have smaller down payments, slightly blemished credit history or higher debt-to-income ratios. The program was designed to expand homeownership and provide loan approvals where there might otherwise be denials.

However, the FHA program is a fully-documented loan. To apply, you must prove that your income is sufficient, stable and sustainable. The program also requires you to document your fund to close - your down payment and closing costs - plus any reserves available to pay your mortgage if you experience an interruption in income. Finally, you may need to explain irregularities in your credit and/or income.

This complete guide shows you what you’ll need to apply for an FHA mortgage.

Step 1: Assemble Your Documents

If you have a very straightforward application, you might need to provide only a couple of pay stubs and bank statements. But you should be prepared to supply whatever an underwriter requests.

Income Documents

FHA underwriters need to know that your income is regular - that you receive it reliably and predictably. They want to be sure that it’s high enough to pay your new mortgage, including property taxes and homeowners insurance, your other monthly accounts and your normal living expenses.

If your job history is stable and you’re currently employed, FHA lenders assume that your income will continue. If you have gaps in employment or a history of jumping from employer to employer, you’ll have to explain why your income should be considered stable.

Employee Income

  • Recent pay stub showing year-to-date income.
  • Last two years of W-2 forms.
  • The lender may have your employer complete a Verification of Employment, or VOE.

Direct verification of employment is not required if you meet the following three conditions:

  • Your current employer confirms a two-year employment history, or your pay stubs reflect your hiring date.
  • Only your base pay is used to qualify you for the loan, excluding overtime or bonus pay.
  • You sign and submit two forms for the previous two tax years: IRS 4506 and IRS 8821.
  • Your lender will contact your employer a second time to make sure you are still employed after you sign your mortgage documents.
Overtime and Bonus Income


If you derive income from bonuses or commissions, you’ll need a two-year history of receiving that income in order for the lender to count it on your application. The lender will develop an average of overtime or bonus income over this period to come up with an amount that contributes to your qualifying income. The lender will also verify with your employer that overtime and bonus income will continue.

Seasonal and Part-Time Income


You need two years of part-time or seasonal income for lenders to count it when you apply for an FHA home loan. The lender will verify with your employer that the work will continue.

Commission Income


The lender will average your commission income over the previous two years. If you have commission income for more than one year but less than two, the lender may contact your employer to assess if your commission income is likely to continue. You’ll need to submit your most recent pay stubs showing commission income and if commissions make up 25 percent or more of your income, you’ll need two years of tax returns.

Military Income

If you are currently employed by a branch of the U.S. military, submit pay stubs showing your base pay. If all or a portion of your pay is tax-exempt, submit documents that validate your tax-exempt status.

If you receive additional benefits, provide documentation to show earnings for housing and clothing allowances, flight or hazard pay, rations, proficiency pay, and Veterans Administration (VA) benefits. Submit a letter from an authorized military official verifying that benefits are ongoing for at least three years.

Self-Employment Income

Proof of steady income for the self-employed can be more complicated, but you can still qualify if you provide the right documentation. Be prepared: Your loan officer will be much more thorough in examining your documentation.

The FHA does not require professionally prepared business reports. However, having a pro look at your income and profit and loss (P/L) statement is money well spent. If you use a certified public accountant (CPA), the CPA can strengthen your application by providing a letter stating he has first-hand knowledge that you have been employed for two years in the same or a similar enterprise.

Make sure you address any outstanding credit issues, disputes with vendors or tax problems before submitting an FHA loan application. Bottom line for the self-employed: Make your paperwork rock-solid. As a small-business person or independent contractor, you will need to show not only that you have had steady employment, but also that you have sufficient net income after expenses. Submissions for the self-employed include:

  • Business income statements for the previous two years.
  • Profit and loss statements for the past two years.
  • IRS Form 1040 including Schedule C (business income and loss) and, if they apply, Schedules B (interest and dividend income), D (capital gain and loss), E (rents, royalties, partnerships), F (farm income and loss).
  • If you are incorporated, submit IRS Form 1120.
  • If you use a CPA, ask for a verification of employment letter stating that the CPA has first-hand knowledge that you’ve been employed for two years in the same or a similar enterprise.

Other Income

There are many miscellaneous sources of income. Mainly, the documentation is the same - proof that you’re entitled to the income, proof that you’re receiving the income, and proof that the income will continue for at least three years.

Alimony or Child Support


If alimony or child support are part of your regular income, your lender wants to be sure the income's source is consistent and verifiable. Submit documentation stating one party is legally obligated to pay the other party, such as a divorce decree, formal separation agreement or court order.

The lender wants to know how much of your income is based on alimony or child support. While standards vary from lender to lender, generally, if alimony or child support is less than or equal to 30 percent of your income, then you must submit documents that show:

  • A minimum of three years' commitment to continue payments.
  • A record of regular, on-time payments at least six months before the loan date, which can be shown through your bank statements or canceled checks.
  • Written evidence showing that the other party is obligated to pay.

If alimony or child support is more than 30 percent of your income, then you must submit documents that show:

  • A record of regular, on-time payments at least one year before the loan date, which can be shown through your bank statements or canceled checks.
  • A minimum of three years' commitment to continue payments.

The FHA does not enforce guidelines on alimony and child support income — your lender does. Since policies can vary, contact your lender to learn its policies before you prepare and submit your alimony and child support documents.

Interest Income


The lender will average your interest income over the previous two years and assess the potential of your assets to continue to retain value and produce interest income. The lender can include interest income from investments if you supply your most recent statements from your bank or asset manager showing interest payments. You might also need signed tax returns from the previous two years or a tax transcript directly from the IRS.

Rental Income


The lender can include income from rents on property you own if you can show that the income is stable. Expect to provide current leases if you don’t have tax returns showing rental income. You may supply bank statements and canceled checks. If you have been claiming rental income on your taxes, submit IRS Form 1040, Schedule E. Roommate income does not qualify, unless the boarder is related by blood or marriage.

Mortgage Credit Certificates (MCCs)


If a federal, state or municipal entity subsidizes your mortgage through direct payments or tax rebates, submit documentation from the appropriate agency showing earnings for a mortgage subsidy or tax rebate payments. The lender can add these payments to your gross income to figure qualifying income or subtract the amounts from the mortgage payment you will need to pay to assess your qualifying ratios.

Retirement Income


The lender will consider retirement income as a contribution to your qualifying income only if the income is expected to continue for more than three years from the date of the mortgage application. The lender can include retirement income if you can show retirement income, such as a 401(k), from your federal tax returns. Social Security income can be proven with your federal tax returns or a statement from the Social Security Administration, such as a current award letter.

Other Government Income


The lender can include federal benefits income, such as Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI), if you can show income from your federal tax returns, a budget Letter or 1099/1042S benefit statement from the Social Security Administration, and recent bank statements showing regular deposits.

Documenting Your Assets

Lenders base their FHA loan approval primarily on your salary and your ability to make your monthly mortgage payments. But you also need to show that you have money for your down payment and closing costs. Provide copies of your savings, checking, investment and retirement accounts, all pages.

In addition, having “reserves” after closing can improve your chances of loan approval. “Reserves” are funds available to make your mortgage payment if you experience an interruption in income. They are measured in months - for example, if your payment is $1,000 and you’ll have $3,000 in the bank after closing, you have three months of reserves.

Down Payment


Your down payment must come from an acceptable source - for instance, a gift, savings, donation from an approved organization, or the sale of assets. Unacceptable sources include unsecured loans like credit card cash advances or money from anyone who will gain from the transaction, like the home seller, real estate agent or lender. You’ll submit copies of your bank, investment and retirement statements, including all pages. You may have to explain any large deposits or bounced checks that turn up on your statements.

Earnest Money


Earnest money is the money you pay as a deposit on your future home when you make an offer for property. That amount — typically 1 to 2 percent of the purchase price — appears on the purchase contract along with a copy of your check. Ultimately it will go toward your down payment and closing costs.

The FHA lender wants to know how you came up with the money. Submit documentation that shows the source of funds, the conditions under which they were supplied and proof that you’ve received them

Gifts


Gift funds are defined as money supplied to you with no expected or implied repayment to the party that is donating the funds. Acceptable sources include:

  • A relative by blood or marriage.
  • A close friend with a clear and documented interest in you, such as a domestic partner, a common-law spouse, or someone else with whom you share a household and your finances.
  • Your employer or labor union.
  • A charitable, government or public organization that provides home ownership assistance.

Some potential sources of gift funds are not-acceptable, including funds from the party that is selling the house or one of the parties involved in the transaction such as a real estate or broker, the home builder or other associated party. From the FHA's point of view, funds from these sources are "inducements to purchase," and are subtracted from the sales price of the home, rather than listed as an asset.

Proceeds From a Home Sale


The net amount you receive on the sale of a currently owned property is a qualifying asset for your purchase of a new home. Provide your closing statement showing that the cash proceeds accrue to you. If the sale of your old home and the purchase of the new home are closing simultaneously, the lender will want proof that your old home has cleared escrow and that you have received the funds before it releases your loan proceeds.

Traded Property


You may agree to trade your property to the seller as part of your investment. Submit your deed of ownership of your current property and any liens and amounts due to third parties on your current property. Your lender will subtract a percentage of your current property's value to accommodate any applicable real estate commissions.

Trust Funds


Trust funds are the cash value available to you in a revocable trust. Submit a deed or ownership document that shows you are the beneficiary. You must include the terms of liquidation.

Life Insurance


Some life insurance policies have a surrender value. Include the value of these in your list of assets. Whole life and universal life policies may include a surrender value — cash you will receive if you close the policy before your death. Submit your deed and any documentation that shows the surrender value. Term life insurance policies have no cash value and do not qualify as an asset.

Personal Property


Personal property — assets like gems, stamp collections, antique cars or gold coins count as assets but lenders only care about them when they will be sold to provide a down payment or closing costs. Otherwise, lenders don’t incorporate their value into underwriting. Submit documentation that shows you are the owner and show a professional third-party appraisal of the market value or proof of sale and deposit to your account if the item has already been sold.

Retirement Accounts


Your lender will likely include only 60 percent of the value of your retirement accounts to account for penalties for early withdrawal and other costs associated with liquidating an account. Submit current statements of pension funds and retirement accounts like Individual retirement accounts (IRAs), 401(k) Keogh and thrift savings plan accounts.

Lump Sums


Some FHA-acceptable assets are typically one-time funding events, such as inheritances, lottery winnings, gambling winnings, capital gains, insurance settlements, victim's restitution and other sources. Expect your lender to ask for documentation to explain the sources of your lump-sum and one-time receipts.

Cash Reserves


Proof of cash reserves for the purchase of a single-family home or a one- or two-unit building can include current checking and savings account statements, 60 percent of the value of retirement accounts, gift funds (funds from authorized sources that have not already been used for down payment and closing costs). If you purchase a three-unit or four-unit property, you’ll need documentation of cash reserves of liquid funds for three months. Gift funds cannot be used as the source for cash reserves for a three- or four-unit property.

Disclosing Your Debts

The FHA and your lender want to make sure you have enough money to make your mortgage payments. Your lender's underwriting department looks at your income, your projected mortgage expense, and any other debt you have. Your lender uses these figures to determine debt-to-income ratios (DTI) and if they meet FHA guidelines.

Try out this DTI calculator to see how much home you can afford with an FHA loan.

When you complete your mortgage application, you must disclose the balances owed and the monthly payments for your current debts. Your lender will usually pull a credit report and use the figures disclosed there. You are responsible for furnishing the terms of any debts not appearing on your credit report.

If you are self-employed and payments that you deduct from your self-employment income show up on your personal credit report, flag them for your lender so the payments don’t get counted against you twice.

You’ll also have to disclose contingent liabilities, which are debts that you don’t owe yourself but could be responsible for under certain circumstances. The most common example would be an account that you have co-signed on. Normally, if the responsible party has been making payments successfully for the last 12 months, the debt won’t be counted against you.

Step 2: Check Your Credit

Of course, your FHA lender will check your credit report and verify your credit scores. But you should do this yourself before you apply for an FHA home loan.

You do not need a perfect credit score to qualify for an FHA loan. However, some entries on a credit report are "red flags" for your lender. You may need to explain these issues on your credit history:

  • Collection accounts
  • Derogatory or delinquent credit
  • Derogatory credit information and judgments
  • Consumer credit counseling service (CCCS)
  • Late mortgage payments
  • Late mortgage payments for cash-out refinance transactions
  • Contingent liability on mortgage debt
  • Late rental payments or other rental references
  • Significant inaccuracy or undisclosed debt
  • Tax liens
  • Credit report inquiries
  • Credit issue documentation

How to Work Around Bad Marks on Your Credit History

To ensure smooth sailing for your loan application, you'll need more than an excuse for a bad mark on your credit history. Prepare solid documentation that the credit report entry is in error or that you are working in a positive manner to resolve the issue.

Examples of documentation can include:

  • Original copies of your transactions and billing.
  • Correspondence you had with the creditor to resolve the issue.
  • Bank statements or canceled checks showing payments to date.
  • A summary statement or letter that you create describing the issue and your actions to resolve it.

Some conditions require more than documentation before you can qualify.

Court-Ordered Judgments


You must pay off judgments in full or have an agreed-upon payment plan, and submit a letter explaining the judgment and your collections history.

Bankruptcy


You must reestablish credit, at least one year for Chapter 13 and two years for Chapter 7.

Foreclosure


Any would-be borrower who lost a home to foreclosure or who has given a deed-in-lieu is not eligible for an FHA-insured loan until three years after the foreclosure. The exceptions to this rule are few: death or disability of a principal wage earner may suffice, but not a job transfer or change in real estate market conditions.

You Do Not Need a Credit History to Qualify for an FHA Loan


Although it helps to have a good credit score, you can qualify for an FHA loan without a credit history or score. If this is your situation, submit documentation that shows your credit-worthiness.

  • A letter from your landlord describing your payment history.
  • Documentation of your timely payments with revolving and installment debt.
  • Correspondence with creditors in which you have a dispute or have agreed on a settlement.

Lenders are free to use underwriting standards higher than the FHA specifies. Find a new lender if your loan application is denied because you don't have a credit history.

Step 3: Submit Your Application for Mortgage Pre-approval

It’s smart to apply for your home loan before you go shopping for property.

  • Mortgage pre-approval (also called “credit approval) means that you, the borrower, are approved. And all you have to do is find an eligible property to close on your mortgage. Getting pre-approved makes the process much smoother and less stressful.
  • Pre-approved mortgages close faster, so you can choose a shorter, cheaper lock for your loan.
  • Pre-approved homebuyers get more respect from home sellers and real estate agents. A pre-approved mortgage is the next best thing to cash. You’ll have an easier time competing with other buyers if you’re pre-approved.

The FHA only allows loans for homes that meet basic safety and habitability standards. For example, the home must be constructed soundly, have a functioning kitchen and be situated a safe distance away from obvious hazards. If the property is a condominium, the home must be included on the FHA's list of approved condos. Homes that don’t meet this standard may be purchased with an FHA 203(k) loan, which finances both the home purchase and rehabilitation costs.

An inspector licensed by the FHA will inspect the home and you will pay for it. This inspection is for compliance with FHA guidelines and is separate from a real estate home appraisal. The inspection will include:

FHA INSPECTION INFOGRAPHIC

FHA INSPECTION INFOGRAPHIC

The FHA-licensed inspector is looking for problems in three areas:

  • Major cracks or holes in walls, ceilings and floors
  • Water damage
  • Damage to the home's foundation or framing
  • Missing or damaged roof shingles and evidence of leaks
  • Proper drainage, so water doesn't collect around the house
  • Defective painted surfaces
  • Crawl spaces that do not provide sufficient clearance for entry
  • Any structural components that do not meet state and local building code standards
  • Defective or inoperable electrical issues: Wires that are frayed, loose or exposed
  • Defective or inoperable heating issues: The heat must go on and be in working condition (a functioning air conditioning system is not required)
  • Defective or inoperable plumbing issues: There must be toilets, sinks and bathtubs or showers and running hot water, sufficient water pressure and no significant leaks
  • Any mechanical elements that do not meet state and local building code standards
  • Rodent or insect infestation
  • Doors, stairs and windows are intact and functioning
  • Septic tank is in working condition (if applicable)
  • Swimming pool pump and drains are in working condition (if applicable)
  • Any house or yard elements that do not meet state and local building code standards
Required Repairs


The FHA requires repairs to any structural or drainage issue as well as any mechanical issue or defective paint surface before the lender may approve the loan. Repairs must be made by a licensed or registered tradesman, and the repairs must be verified and documented by an appraiser or other licensed person.

About the Author


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Michael Galvin is an award-winning author with extensive experience in marketing, real estate development, sales and financing. Galvin worked in real estate development for 20 years, and has written more than 1,200 news and feature articles on home loans and property transactions.