Part of being a successful real estate team is knowing who can help us get our buyers through what can be a daunting task for someone who has never done it before – loan approval. It’s all about who you know, and we are fortunate enough to know several FHA loan experts.
One of those lenders provided the following take the process of applying for FHA loans:
Several times per week, I’m asked the following question: “What do I need to do to be approved for a loan to buy a house?”
My answer to them is to tell them that they’ve already taken the first step by asking that question! Then we proceed to take a look at their specific situation to see what options are best for them.
The biggest disadvantage that homebuyers face today is a lack of valid information. It’s not their fault – and it’s not their agents’ fault – with today’s ever-changing economical climate, it’s very difficult to have information that is accurate and up to date. What was true last week or last month is most likely different today.
Most first time homebuyers today aren’t working with the 10-20% to put down that our parents had when they bought their first house. And thankfully, it’s no longer mandatory for them to have that large down payment in order to buy a house.
That’s why FHA mortgages are perfect for that individual that has the credit, but not the cash… So, what can we do?
Let’s take a look at FHA financing and what is required for approval.
First step – call a Loan Officer
Loan officers are directly connected to FHA lending guidelines and have up-to-the-minute information as far as what is needed to qualify, and what is needed to close. In a 10-15 minute phone conversation, they can obtain all of the necessary information to determine:
- If they qualify for financing, &
- How much money they can be approved for.
In an initial phone conversation they can:
- Review a buyer’s credit credit
- Obtain a 2 year residence history
- Obtain a 2 year employment history and income information
- Obtain asset information
NOTE: The minimum credit score for any FHA approval is a 580. (Based on information received from Equifax, Trans Union, and Experian). Lenders will look at all 3 credit scores, and use the middle of the 3 scores to qualify. If there is a co-borrower on the loan, the lower middle score is used to qualify. If your credit score is 620 or higher, your interest rate will be lower!
Second step – submit documentation
Current paystubs – FHA requires a full 30-day history of paystubs, including the most recent paystub received. If the buyer is paid weekly, lenders will require the most recent 4 paystubs – if they are paid bi-weekly, or semi-monthly, they will collect the most recent 2 paystubs. Paystubs must be typed or computer-generated (not hand-written), and must include the gross income that has been received year-to-date. If there is a co-applicant on the loan, the same information is required of them as well.
W2’s – FHA requires W2’s for the past 2 full tax years. They will need ALL W2’s received during those 2 years for all jobs held and income received (even if they only worked there for a short while). Any income reported on a tax return must be documented with either a W2 or 1099.
Tax Returns – 2 years of tax returns are required from ALL individuals applying for FHA loans. Even if buyers have W2s to show their income for the last 2 years, the FULL tax returns (including all attached schedules) are required. This is required so as to document all income and losses for those years. Any losses appearing on the tax returns will be included when calculating their average income over the 2 year period.
Bank Statements – FHA requires the most recent full 2 months bank statements. Any account from which funds are being used for the down payment, closing costs, or reserves must be documented. If the buyer is obtaining gift funds from a family member, the lender will have them and the donor complete a Gift letter that states that the funds are being given as a gift (and not as a loan requiring repayment).
These are the primary items that are collected when submitted the loan application to FHA for approval. After the initial review by underwriting, they may request some additional items (case by case)
- Letter of explanation of any credit report inquiries throughout the last 90 days
- Letter of explanation regarding any derogatory credit items appearing on the credit report
- Letter of explanation regarding any gap in employment for more than 90 days
- Letter of explanation regarding any significant increase or decrease in income, or unusual activity appearing on their bank statements (large deposits or withdrawals).
**The advantage of FHA is that they do accept unique situations that the borrower has encountered regarding their credit, employment, or income. So, banks encourage everyone to apply, even if they think they don’t make enough money, or have enough money to put down. **
FYI: Borrowers using FHA loans can receive assistance from the sellers (of up to 6% of the sale price of the home) to help cover their loan costs. These seller-paid costs can include
- Closing costs
- Homeowners and Flood Insurance
- Property Taxes
This seller-paid assistance could include everything but the 3.5% down payment. There are even programs available that can help the buyer with the amount they need for their down payment.
And, finally the third step… – GO FIND A HOME!
Once a homebuyer has been pre-approved, and has identified and secured a purchase contract on the property they wish to buy, the lender will order the appraisal and title work, and work towards a closing within 30-60 days.