How to Apply for an FHA Loan: Complete Steps & Requirements
If you’re ready to purchase your first home through an FHA loan, you’ll need to go through four easy steps to apply for financing: exploring lenders, preparing your documents, checking your credit and submitting your application.
FHA loans are mortgages that the Federal Housing Administration (FHA) oversees, monitors and insures. They are flexible compared to conventional loans and have lower down payments and credit score requirements, making them perfect for first-time homebuyers or those who do not qualify for traditional mortgages.
An FHA loan’s requirements include needing a minimum FICO score of 500, a maximum debt-to-income ratio of 56.9% and a minimum down payment of 3.5%. FHA loans are fully documented loans, meaning you must still meet requirements and go through the application process successfully to get your desired borrowing amount.
If you've decided that an FHA loan is the type of financing you wish to pursue, review the application procedures below to help you map out your plan.
Applying for an FHA loan is simple and involves comparing lenders, preparing documents, checking your credit and submitting your application.
Requirements for an FHA loan include a minimum FICO score of 500, a maximum debt-to-income ratio of 56% and a down payment of at least 3.5%.
The U.S. Department of Housing and Urban Development (HUD) offers a tool to help you find lenders that offer FHA loans.
Step 1: Explore FHA-Approved Lenders
There are many banks and lenders that offer FHA loans, including Bank of America, Rocket Mortgage, NBKC Bank and more — but their terms can vary. Although FHA loans are regulated, private lenders are free to determine interest rates and implement fees.
Lenders also have varying levels of experience with FHA loans, and thus it’s often smart to look for entities that have closed many FHA loan applicants. This is one reason it’s helpful to compare lenders when trying to find the best FHA lender near you.
If you aren’t sure which lenders offer FHA loans in your area, you can use the HUD FHA lender directory to search for options.
Step 2: Assemble Your Documents
FHA loans have more lenient requirements than traditional mortgages, but you will still have to provide the lender with documents to prove that you can repay the loan. Preparing beforehand can speed up the application process and ensure you’re on track to getting the funds you need for your home sooner.
To ensure that you can repay your loan, FHA lenders require documents to prove that you receive income on a regular and consistent basis. Even if there is no minimum income limit, your income needs to be sufficient to cover your monthly mortgage payment, property taxes and homeowners insurance.
Borrowers with a consistent employment income may be able just to provide a paystub and certificate of employment. However, if the borrower has a history of unemployment or gaps in their working histories, lenders may also require proof of income stability. Proof of income can include pay stubs, bank statements, W-2 income statements, tax returns or a formal letter from an employer.
Aside from the standard sources of income, there are other miscellaneous sources of income you can report. However, you need to ensure you can still provide proof that you’re receiving said income and that it will continue for at least three years.
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, including all pages. Also, having financial 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.
Your down payment must come from an acceptable source like 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 need to submit copies of your bank, investment and retirement statements, including all pages. You may have to explain any large deposits or bounced checks in your statements.
Earnest money is the money you pay as a deposit on your future home when you make an offer for the property. Ultimately, that amount will go toward your down payment and closing costs.
If the earnest money deposit is greater than 2% of the sale price, the FHA lender is required to verify how you came up with the money. However, even earnest money deposits of less than 2% may be subject to scrutiny. If requested, submit documentation that shows the source of funds, the conditions under which they were supplied and proof that you’ve received them.
Gift funds are defined as money provided to you with no expected or implied repayment to the party 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 homeownership assistance.
Some potential sources of gift funds are not acceptable, including funds from the party 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 home's sale price 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.
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. Your lender will subtract a percentage of your property's value to accommodate any applicable real estate commissions.
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.
Some life insurance policies have a cash surrender value. Include the value of this, if you have it, in your list of assets. Whole life and universal life policies may include a cash surrender value, or funds you will receive if you close the policy before 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, or assets like gems, stamp collections, antique cars or gold coins, count as assets. However, lenders only care about these if you sell them to fund your down payment or closing costs. Otherwise, lenders don’t incorporate their value into underwriting.
You will need to submit documentation that shows you are the owner, a professional third-party appraisal of the market value or proof of sale and a deposit to your account if you have already sold the item.
Your lender will likely include only 60% of the value of your retirement funds to account for penalties for early withdrawal and other costs associated with liquidating the account.
You will need to submit current statements of pension funds and retirement accounts like individual retirement accounts (IRAs), 401(k)s, Keogh or thrift savings plan accounts.
Some FHA-acceptable assets are 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 origins of your lump-sum and one-time receipts.
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% of the value of retirement accounts and gift funds (funds from authorized sources that you have not already for the 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. You cannot use gift funds 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, projected mortgage expense and any other debt you have.
Your lender uses these figures to determine debt-to-income ratios (DTI) and whether they meet FHA guidelines. Try out this DTI calculator to see how much home you can afford with an FHA loan.
When completing 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 you deduct from your self-employment income show up on your personal credit report, flag them for your lender so that the payments don’t get counted against you twice.
You’ll also have to disclose contingent liabilities, debts 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.
Typically, if the responsible party has been making payments successfully for the last 12 months, the debt won’t be counted against you.
Step 3: Check Your Credit
Verifying your credit score is part of the lender’s application process. If you want to make a down payment of at least 3.5%, lenders will require a minimum credit score of at least 580. However, if you have enough to make a 10% down payment, you can get approved with a credit score of at least 500.
If your credit score has yet to meet the minimum requirements, focus on improving it first. This means paying off outstanding debt, reviewing credit reports, reducing credit utilization and more.
Improving your credit score can go a long way toward helping your financial standing in the long run, giving you more space to save for your home and opening the door to better loans.
How to Work Around Bad Marks on Your Credit History
A perfect credit score isn’t necessary for an FHA loan, but having certain marks on your history can put your loan approval at risk. For instance, you may need to explain these issues if you have them 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
To explain, you will have to provide documentation that these issues are errors or, if they are not, that you are working on improving them. Documentation could 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 situations require more than documentation before you can qualify. For instance, court-ordered judgments, bankruptcy and foreclosure are all indicators of serious financial issues.
- 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 collections history.
- Bankruptcy: You must reestablish credit for 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 could include the death or disability of a principal wage earner but not a job transfer or change in real estate market conditions.
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 creditworthiness.
- 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 4: Submit Your Application
It’s smart to apply for your home loan before shopping for property.
- Mortgage pre-approval (also called credit approval) means that you are approved to borrow a certain amount of funds. And all you have to do is find an eligible property to close on your mortgage. Pre-approved can make the process smoother and less stressful.
- Pre-approved mortgages close faster, so you can often choose a shorter, cheaper lock for your loan.
- Pre-approved homebuyers get more respect from home sellers and real estate agents and will help you compete with other buyers. A pre-approved mortgage is the next best thing to cash.
The FHA only allows loans for homes that meet basic safety and habitability standards. The home must be constructed soundly, have a functioning kitchen and be situated a safe distance away from obvious hazards.
The home must be included on the FHA's list of approved condos if the property is a condominium. 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 at your expense. This inspection is for compliance with FHA guidelines and is separate from a real estate home appraisal. The inspection will include:
The FHA-licensed inspector is looking for a number of problems including, but not limited to:
- 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 that 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
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. A licensed or registered tradesperson must make repairs, and the repairs must be verified and documented by an appraiser or other licensed person.
Frequently Asked Questions About FHA Loans
FHA loans are a great way to purchase your first home, but like any financing option, they can be confusing to navigate. Review some of the most frequently asked questions about FHA loans below.
About the Author
- Federal Deposit Insurance Corporation (FDIC). "Affordable Mortgage Lending Guide." Accessed July 16, 2022.
- U.S. Department of Housing and Urban Development. "Section B. Acceptable Sources of Borrower Funds." Accessed July 17, 2022.
- U.S. Department of Housing and Urban Development. "Section D. Borrower Employment and Employment Related Income." Accessed July 17, 2022.
- U.S. Department of Housing and Urban Development. "Section E. Non-Employment Related Borrower Income." Accessed July 18, 2022.
- U.S. Department of Housing and Urban Development. "Handbook 4000.1, FHA Single Family Housing Policy Handbook." Accessed July 18, 2022.