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How To Apply For an FHA Home Loan

Understanding how to apply for an FHA loan will get you that much closer to qualifying for a low down payment mortgage.

December 18, 2023
December 18, 2023
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Wondering how to buy a house with little money down? Taking time to apply for an FHA loan might just be your ticket. 

Backed by the Federal Housing Administration (FHA), FHA loans make homeownership affordable through a 3.5% down payment requirement and flexible credit guidelines.

To sweeten the deal, FHA loan rates are often lower than you’ll find on conventional mortgages, thanks to the government backing.

Here’s the lowdown on how to apply for an FHA loan.

How to apply for an FHA loan

Today’s homebuyer has more choices than ever before about how to apply.

You no longer have to take time off of work to travel to a bank office to converse in-person with a loan officer. If you’re more comfortable with that style, it’s available to you.

For many homebuyers, it's easier to apply online during off-hours – when the work day is done or the kids are in bed. Most lenders let you apply online 24 hours a day. Or you can call if you’d like to be guided through the process.

Today’s homebuyer is in control of how and when they apply, and that’s one of the many advantages of being a modern homebuyer.

What do you need to apply for an FHA loan?

The good news is that you don’t need anything on hand to apply.

Whether you prefer to apply for an FHA loan online or speaking to a professional, you will likely field questions you know how to answer off the top of your head. No need to compile all your paperwork for that initial call or click.

Applications take as little as 15 minutes to complete.

Once you’ve applied, you’ll submit documentation to support what you’ve verbally told the lender. What paperwork do you need? Read on.

FHA loan document checklist

You’ll need documentation of your income and assets to apply for an FHA loan. The lender will pull your credit report as proof of debts and accounts, and to obtain your credit score.

Specifically, it helps to have the following documents ready shortly after you apply:

  • W-2 forms (for the last two years)
  • Your pay stubs for the last month
  • Bank statements
  • Investment account statements (brokerages, retirement accounts, etc.)
  • Employers for the past two years (names and addresses)
  • If self-employed, a profit and loss statement (P&L) for the current year and tax returns for the previous two years
  • Proof of other income, such as alimony and child support if you choose to disclose that income

The types of documents you need will depend on the type of work you do and how you earn your income. Full-time employees can use their pay stubs, for instance, while self-employed borrowers or those who receive commission or bonus may need to show tax returns.

A loan officer with your preferred lender will explain everything they’ll need to process your application.

Should I apply for an FHA loan?

FHA loans make homeownership more achievable for many people, especially first-time homebuyers. In fact, 83% of FHA purchase loans were for first-time buyers, according to the FHA’s Annual Report for 2020.

A 3.5% down payment is much easier to save for than the traditional 20%, so you can achieve your dream of homeownership that much sooner by going FHA.

Consider that on a $200,000 home, you’d have to save a hefty $40,000 to afford a house with the traditional 20% down. But the down payment on an FHA loan for the same home totals just $7,000 — $33,000 less.

Many conventional loan programs now allow you to put down as little as 3%. But FHA often has lower interest rates and lower mortgage insurance premium (MIP) rates than you’d find with conventional interest rates and private mortgage insurance (PMI).

It's worthwhile to apply for an FHA loan if you have an average credit score or have experienced some bumps with credit in the past. FHA lenders can approve buyers with credit scores of 580 and above. Some will approve a loan with scores between 500 and 579, although they will require a 10% down payment.

Should I get preapproved for an FHA loan?

Why all the documentation? Because it makes finding a home much easier.

A lender can issue you a prequalification. That just means you appear to be approved based on your verbal application.

But “pre-quals” can fall through: You may have overstated your income or assets – at least the amount that lenders can use for qualification.

If you want to be sure, get preapproved. This involves submitting all your documentation to the lender prior to finding a home. If everything checks out, they hand you a very special piece of paper called a preapproval. That’s your ticket to earning the seller’s and agent’s trust when making an offer on a home.

Getting preapproved before you apply for an FHA loan is smart for three main reasons.

1. You find out where you stand

A preapproval gives you an idea of how much you can borrow and whether you’ll qualify for a loan right now.

You might be approved with flying colors. That’s great. But if not, you want to know as soon as possible – not after you’ve found a home you love.

Your applicationmay be turned down because you carry too much debt or your credit score is too low.

FHA lenders often require that your total mortgage payment and consumer debt payments (such as credit card and car loan payments) aren’t much above 50% of your gross (pretax) monthly income.

This is known as a back-end debt-to-income ratio (DTI). If a lender turns you down because of your DTI, you’ll know that you need to lower your overall debt or raise your income before you can buy a home. While that may seem disheartening at first, it’s empowering to know exactly what you need to do to get into your own home.

2. You can compare your options

A preapproval also allows you to determine whether an FHA loan is actually the best option for you. Despite their many benefits, FHA loans do have some drawbacks.

You must pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount for FHA.   There is no upfront mortgage insurance requirement with a conventional loan, even if you only put down 3-5%..

And, a conventional loan may be the better option if you have excellent credit. You’ll pay private mortgage insurance (PMI) until you reach 20% equity, but after that, it  falls off.

Getting preapproved tells you all the potential loan programs that may be right for you, allowing you to make the most informed choice.

3. You can make an offer that sellers take seriously

Preapproval lets you know the price range of homes the lender may approve. You can look for houses in neighborhoods and home styles that suit that range, knowing that approval is likely.

Finally, preapproval gives you a competitive edge over other buyers.

If more than one person bids on the home you want, the seller is very likely to choose folks who have been preapproved. Sellers are picky in this market and will simply toss out offers without strong financing attached.

The FHA homebuying process

If your preapproval for the FHA loan application is successful, you’ll get a preapproval letter from the lender specifying the amount they would likely lend you.

You can then make an offer when you find a house you want to buy. If your offer is accepted, the final application will move forward.

Here’s what the full FHA loan process looks like:

A preapproval is an estimate of how much money you can borrow. You don’t want to spend several weekends in a row looking at homes, find a home you love, and then find out you don’t qualify for a loan! Besides that, applications can be turned down for many reasons. A preapproval rejection can be hard to take, but it has a silver lining. You can ask your lender why the preapproval wasn’t successful. Then, work to fix the reason you were turned down and reapply in a couple of months.

Look for homes

After you’ve been preapproved, you can start looking at homes in your price range. If you work with a real estate agent, tell them you’re interested in using an FHA loan. They can then offer guidance on which homes are likely to qualify for FHA financing and which may not pass the appraisal.

Make an offer

When you find the house you want to buy, it’s time to submit your offer. Sellers in hot markets may be hesitant to accept an FHA offer because of the property requirements. But a seasoned real estate agent can help you write a strong offer and may be able to give you other tips, such as putting down more earnest money.

Schedule an appraisal and inspection

Your lender will schedule a home appraisal. The appraiser will determine whether the home meets FHA property guidelines. They’ll also assess the value of the home. The lender will not let you borrow more than the home is worth. If the home appraises for less than the amount you offered, you’ll have to make up the difference in cash or look for another property. At this point, you can schedule a home inspection as well. Lenders don’t require inspections for FHA loans, but you’ll want to get one for your own protection. An inspector will look for issues with the structure, electricity, plumbing, and other essential areas of the home. You definitely want to know about potential problems before you take possession and become responsible for all of those repairs — and their associated costs.

Negotiate any necessary repairs

If the appraisal report shows any deal-killing problems, those must be addressed before the lender will approve the loan. Negotiate with the seller on who is going to pay for those repairs and when they’ll be made. This is also the time to resolve any problems that came up during the inspection. The seller may agree to make the required changes, or they may lower the sale price if you agree to handle the repairs.

Close on the house

Once the repairs have been made and the lender has verified your credit, income, assets, and debts, you’ll schedule your closing. This is when you sign all of your loan documents. But the house doesn’t become yours for another couple of days, on the funding date.

Take possession of your home!

Your funding date is when the bank releases funds, the seller is paid, and the house is officially yours. You can get your keys and savor the rewards of the homebuying journey.

Finding an FHA lender

Before you apply for an FHA loan, you’ll need to find an FHA-approved lender. Although they are called “FHA loans,” the FHA does not actually lend money to borrowers. Financial institutions such as mortgage lenders, banks, and credit unions do. The FHA is a government agency that insures the loans. That insurance is the reason that lenders feel comfortable with smaller down payments and less-than-stellar credit scores. Many lenders offer FHA loans and will make it clear through their advertising. When in doubt, check a lender’s website or call them. You can also look up FHA lenders on the U.S. Department of Housing and Urban Development’s (HUD) website. To start your FHA loan application, choose the method most comfortable for you. Many lenders have online portals for applications. You may also be able to apply over the telephone or if you prefer the traditional method, you can meet with a local loan officer in your area.

How can I know if an FHA loan is right for me?

FHA loans are designed for moderate- and low-income borrowers. It may be the right choice if you:

  • Have a great score of 580 or higher
  • Can afford a monthly mortgage payment but don’t have a large down payment saved
  • Are willing to buy a home within the FHA’s loan limits

There are no income or geographic restrictions on FHA loans. They can be a great choice if you have only a low down payment available or have a spotty credit history that has affected your credit score.

Applying for an FHA loan FAQs

Who qualifies for an FHA loan?

There are a number of requirements for FHA loans:

  • Credit score of at least 580
  • A 3.5% down payment
  • Upfront mortgage insurance payment of 1.75% of the loan, wrapped into the loan amount
  • Monthly mortgage insurance premiums
  • Home is a one- to four-unit property
  • Home meets the FHA mortgage limits
  • The house meets HUD’s minimum safety standards for soundness and durability
  • The property will be your primary residence

Lenders can set their own guidelines in addition to the government criteria, so it helps to apply with several companies to see what each offers you.

Are FHA loans bad?

FHA loans aren’t bad at all —   and they can be great options for people who can only afford low down payments and who have average credit.

That said, they do have potential drawbacks:   

  • Upfront mortgage insurance premium (MIP). You’ll have to pay an upfront mortgage insurance premium of 1.75% of the purchase price. The upfront MIP can be wrapped into the loan, but doing so will raise your monthly payments
  • Annual MIP. You’ll pay a yearly MIP of 0.15% to .75, divided into 1/12 installments and paid monthly with your regular payment. This applies for the entire 30-year term of the loan. However, most people refinance out of FHA with a conventional loan after a few years. With conventional loans, private insurance is no longer required once you have 20% home equity
  • Property restrictions. Your property has to meet safety and soundness requirements. If you have a fixer-upper in mind, it might not meet FHA criteria. But in that case, you can look into an FHA 203k loan, which allows you to buy and repair the property with one loan
  • Price limitations. The local loan limits may rule out certain homes, particularly if you have your eye on a higher-end property
  • Seller hesitation. It’s possible that you’ll encounter some seller hesitation because of the FHA’s strict property requirements. But you can work with your real estate agent to write a compelling offer and anticipate some of the seller’s concerns      

Where do I apply for an FHA loan? You can apply online, over the phone, or in-person with an FHA-approved lender. These include mortgage lenders, banks, and credit unions.

How do I get approved for an FHA loan? You’ll need to apply through an approved FHA lender and meet certain requirements, including having a credit score of 580 or higher and being able to make a down payment of 3.5% or more. Some lenders will approve you with a credit score of 500-579, but you’ll need a 10% down payment. The property you want to buy must also pass an appraisal with an FHA-approved appraiser. You will need proof of income, your total assets, and your total debts.

What are the requirements for a house to qualify for an FHA loan? The house must meet safety, soundness, and durability standards. You must receive an appraisal that states the home meets FHA property guidelines. If there are any deficiencies, you or the seller must have them fixed before you close on the home. The FHA also requires that the purchase price not exceed its mortgage loan limits. Loan limits are set annually based on median home prices in specific areas. You can look up mortgage limits by area here.

How do I know if a house is FHA approved? Your lender will schedule an appraisal with an FHA-approved appraiser after the seller accepts your offer. The home must have no more than four units, and it must meet FHA safety and livability standards. FHA mortgages can also be used to purchase a condominium, but the condo complex must be FHA-approved. You can find out whether yours makes the list by checking the FHA-approved condo list.

Is it hard to get an FHA loan? FHA loans can be easier to qualify for than conventional loans because of the lower credit score requirements and flexible debt-to-income guidelines. However, you still need to meet all the criteria to be approved for a loan, and the house must meet the FHA’s safety and loan limit requirements.   

How long does it take to get an FHA loan approved? The mortgage approval process on any loan can take from two to three weeks to several months. Approval depends on many variables, including completeness of the application and the number of applications a lender is processing at the time.

What are the downsides of buying a house with an FHA loan? Although FHA loans help many people become homeowners —  more than 80% of them first-time homebuyers —  they do have potential downsides. The biggest is the mortgage insurance premium (MIP). FHA loans require you to pay an upfront MIP of 1.75% of the home price. They also require an annual MIP of 0.15% to .75, which can last for the life of the loan. The home you want to buy must also meet FHA property requirements and fall within the loan limits for your area.  

What are red flags for underwriters? Underwriters look for signs that you won’t be able to afford your mortgage, including a loss of employment or a sudden significant increase in credit card debt, so you want to keep your financial situation steady throughout the loan process. If you were preapproved at a certain credit score and debt-to-income ratio and you then take out a car loan, those numbers change and could jeopardize your mortgage. Lenders can deny loans up until closing if underwriters see evidence that you can’t afford the home.

Who pays for an FHA inspection? The buyer traditionally pays for the home inspection. The cost is typically around $500 for the average home, but could be much more or less depending on your area and the home’s complexity and size.

Who pays closing costs on an FHA loan? Traditionally, the buyer pays closing costs, although you can negotiate with the seller to share those expenses. Closing costs are typically 2-5% of the loan, and they include origination fees, title searches, real estate attorney costs, and other fees. You may be able to finance closing costs as part of the loan. But be careful, because closing costs add up! If you roll them into your mortgage, the monthly payment increases, so make sure you can afford the payment if you opt to pay the closing costs as part of the loan. You may also qualify for closing cost assistance through state or local programs to help offset the upfront costs of the mortgage.

Can my loan be denied at closing? Yes, loans can be denied at closing. Changes in your financial situation or the house itself can trigger a denial. If you lose your job between approval and closing, for example, the lender may deny the loan because you no longer have sufficient income to make the monthly mortgage payments.

What if I can’t afford closing costs? Closing costs are frequently wrapped into the loan. You can look for assistance with down payment and closing costs as well. Check with the National Council of State Housing Agencies (NCSHA) to see if there are programs in your area that assist with closing costs.

What if I can’t afford the down payment? If you don’t have enough savings for a down payment, the FHA allows several different methods of obtaining a down payment, including gifts, loans, grants, and employer assistance. All these require documentation, so don’t just accept a gift from a family member without obtaining a record of it. Check your state’s Housing Finance Agency (HFA) at the NCHSA website to find available assistance programs for down payments. HUD also provides a state-by-state list of potential groups providing assistance.

I’m ready to apply

It’s a fantastic time to buy a home. It can be a smart decision to apply and at least know where you stand. Applying is easy, and many lenders are approved to do FHA loans. As mentioned in this article, you don’t need anything on-hand to get started.


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