Buying a home can be a daunting task. However, there are programs in place for first-time homebuyers to make it a little easier.
One of the ways you can get a mortgage, even if you don’t have a big down payment or a perfect credit score, is the Federal Housing Administration (FHA) loan program.
Best FHA Lenders and Online Marketplaces
Here are some of the best FHA loan lenders, as well as marketplaces where you can easily compare your options.
You can live in any state and get access to an FHA mortgage through loanDepot.
One of the first places to look for an FHA mortgage is LendingTree, an online marketplace.
Over the years, Quicken Loans has become one of the most trusted lenders in the business.
Access to FHA loans is a hallmark of New American Funding, which offers several programs. With this company, you can even explore the possibility of an FHA renovation loan.
In addition to allowing applicants to provide nontraditional trade lines for underwriting consideration, Flagstar Bank is also known for offering loan packages meant for professionals.
The mortgage arm of Citibank allows you access to the resources of one of the most recognized nationwide banks.
Another high-profile national bank, U.S. Bank offers several mortgage products. In addition to getting started online, you can also call a number and speak with a mortgage specialist — including someone near you.
It can be very difficult for borrowers with poor credit to take out a conventional mortgage. If your credit score is low due to financial mistakes in your past, then Carrington Mortgage Services may be a suitable option for you.
PennyMac is based in California and does have some brick-and-mortar locations, but the company is known for its superior online services. The company is considered one of the top five mortgage lenders in the U.S.
How do FHA loans work?
Understanding FHA loans can help you buy a home that you can afford. Here’s what you need to know about getting an FHA loan and the best FHA lenders.
FHA loans are backed and guaranteed by the federal government. The government doesn’t actually make the loans, though. Instead, FHA loans are actually originated by individual FHA loan lenders who are approved by the government. The Federal Housing Administration backs the loans, so lenders feel more comfortable with borrowers that might seem to present something of a higher risk.
FHA Loan Requirements
With an FHA loan, you can put down as little as 3.5% for a down payment if you have a minimum credit score of 580. Additionally, there are FHA loans available for those with even lower credit scores, as long as they put down 10% of the purchase price.
You apply for an FHA loan much as you would for any other mortgage loan. The FHA lender will still review your credit history, income information, and other factors. Ultimately, this determines whether you’re approved, how much you can borrow, and your interest rate. You’ll have to pay for private mortgage insurance during your FHA loan, though, so be aware of that added cost.
Before you choose a mortgage lender, though, it’s important to compare your options. Just as you can with any other loan quote, you can shop around and compare offers from different FHA mortgage lenders. Start by looking at the best lenders for FHA home loans. That way you have a better chance of receiving terms that work best for you.
Step-By-Step Guide to Applying for an FHA Loan
Applying for an FHA loan is not as intimidating as it may seem, especially if you break it down into manageable steps. Here’s a clear, concise, and practical guide to walk you through the process:
- Identify your budget: It’s crucial to understand what you can afford before you start the loan process. Use online mortgage calculators to determine a comfortable monthly mortgage payment based on your income and current debt.
- Check your credit score: Ensure your credit score is in the best shape possible, as it directly affects the interest rate you’ll be offered.
- Choose an FHA-approved lender: Not all mortgage lenders are approved to offer FHA loans, so make sure the ones you’re considering are on the FHA’s approved lender list.
- Get pre-approved: Pre-approval gives you a clear idea of the loan amount you might qualify for. It involves providing your lender with financial information, like your income, assets, and debts.
- Find your home: Once pre-approved, you can start house hunting. Remember to stick to homes within your pre-approved budget.
- Apply for the loan: After you’ve found your home and made an offer, you can officially apply for the loan.
Essential Documents for FHA Loan Application
Documentation is key to getting an FHA loan. While the specific documents required may vary slightly by lender, you will typically need the following:
- Proof of employment and income: This could be W-2 statements, pay stubs, or tax returns.
- Credit information: The lender will pull your credit report, but be prepared to provide any additional documentation they request.
- Proof of assets: This includes bank statements, retirement accounts, and any investment accounts.
- Residential history: You may need to provide your housing history for the past two years.
- Appraisal report: An FHA-approved appraiser must evaluate the property you intend to buy.
Improving Your Credit Score and Debt-to-Income Ratio
While FHA loans are known for their lenient credit requirements, improving your credit score can help you secure better loan terms. Here are some ways to boost your score:
- Pay all bills on time.
- Reduce your credit card balances.
- Avoid applying for new credit just before applying for a loan.
Your debt-to-income (DTI) ratio is another important factor. It’s the percentage of your gross monthly income that goes toward paying debts. A lower DTI is preferable as it indicates you have a good balance between debt and income. Ways to improve your DTI include:
- Paying down existing debt.
- Avoid taking on new debt.
- Increasing your income, if possible.
How to Find the Best FHA Lender
To find the best FHA-approved lender, you will want to compare quotes from multiple lenders. Once you have at least three or four FHA loan quotes, it’s time to compare them. You want to make sure you’re comparing apples to apples, though. Some of the items that you need to watch for in a loan offer include:
- Loan origination fees
- Interest rate (including whether it’s fixed or adjustable)
- FHA mortgage insurance
- Required down payment
- Length of loan term
- Closing costs
- Estimates for property tax and home insurance
Make sure the terms are roughly the same so you can make a good comparison. You might also want to see if your potential mortgage lenders are willing to run different scenarios if you’re willing to pay points.
Run the Numbers
You might need to run a few numbers on your own to determine which trade-offs are worth it. For example, one FHA mortgage lender might have no origination fees but charge a higher interest rate.
If interest rates are low enough, you might be better off working with an FHA mortgage lender that charges an origination fee.
Carefully consider these items, and look at the total cost of the loan. In the end, you want a loan that is likely to cost you the least amount of money, while still allowing you to afford your monthly payments.
Common FHA Loan Mistakes and How to Avoid Them
Navigating the world of FHA loans can be tricky, and it’s not uncommon to make a few missteps along the way. Here are some common mistakes borrowers make and tips on how to avoid them:
Mistake 1: Not Understanding the Costs Involved
While FHA loans are a great option for many homebuyers, they come with certain costs like upfront mortgage insurance and annual premiums.
Avoidance Tip: Ensure you fully understand all the costs associated with an FHA loan. Factor these costs into your budget to avoid unpleasant surprises down the line.
Mistake 2: Skipping the Pre-Approval Process
Some borrowers jump straight into the house hunting process without getting pre-approved for a loan, which can lead to disappointment if they can’t secure the necessary financing.
Avoidance Tip: Always get pre-approved before you start your home search. This will give you a clear understanding of what you can afford and make you a more attractive buyer to sellers.
Mistake 3: Not Shopping Around for Lenders
Many borrowers stick with their existing bank or the first lender they come across without comparing options.
Avoidance Tip: Take time to shop around. Different mortgage lenders may offer different interest rates, closing costs, and service levels. Comparing lenders can potentially save you thousands of dollars over the life of your loan.
Mistake 4: Overlooking FHA Loan Limits
FHA loan limits can vary by location and property type, and overlooking these limits can complicate the home buying process.
Avoidance Tip: Be sure to check the FHA loan limit for your specific location and the type of property you’re considering. Stay within these limits to ensure a smoother loan application process.
Mistake 5: Neglecting Your Credit Score
Even though FHA loans are known for lenient credit requirements, neglecting your credit score can lead to unfavorable loan terms.
Avoidance Tip: Regularly monitor your credit score. If possible, take steps to improve it before applying for a loan. A higher score can lead to better interest rates and more favorable terms.
Conclusion: Choosing the Right FHA Lender and Final Thoughts
Throughout the journey of homeownership, choosing the right FHA lender can make a significant difference. Your lender plays a pivotal role, not only in terms of offering competitive rates and costs but also providing guidance and support throughout the home buying process. It’s crucial to find a lender that is not only FHA-approved but also aligns with your financial needs and goals.
Keep in mind, FHA loans are an excellent tool for many aspiring homeowners, particularly first-time buyers and those with lower credit scores or a smaller down payment. However, it’s important to understand all aspects of these loans, from the costs involved to the loan limits and the application process.
Before you embark on your home buying journey, equip yourself with the right knowledge. Do your research, consider your options, and don’t hesitate to seek professional advice if you need it. Remember, it’s about finding the right fit for your situation – what works best for you may not work as well for someone else.
While the road to homeownership may seem daunting, it is one filled with opportunities. By avoiding common mistakes, improving your credit score, and choosing the right lender, you can navigate the process with confidence. Homeownership could be closer than you think. Here’s to your successful journey on the road to owning your dream home!