FHA loans are one of three government-backed loans that come with some level of guarantee to the lender issuing the loan. With the FHA program, should the loan ever go into default the lender is compensated for the loss. This guarantee comes in the form of two separate mortgage insurance policies that accompany the loan, paid for by the borrower. An upfront fee equal to 1.75% of the loan amount and an annual premium of 0.80% of the loan, paid in monthly installments. Because of this guarantee, lenders can approve an FHA loan with a low down payment that may not approve a similar conventional loan under the very same terms. Here’s what you can expect during the FHA loan approval process.
First, the lender must be approved to underwrite FHA loans, where the individual underwriter is certified as a Direct Endorsement underwriter. Most lenders today who originate FHA loans are in fact considered as an FHA “DE” lender. Once a lender is selected, the applicant submits a loan application for a preapproval. A preapproval is issued after the lender reviews income and asset documentation as well as a review of a credit report and credit scores.
As it relates to income, lenders will ask for copies of recent paycheck stubs covering 30 days and the two most recent W2 forms. If self-employed, the lender requires the two most recent federal income tax returns. Lenders will also ask for copies of bank or investment statements from the accounts holding the necessary cash needed for the 3.5% down payment and associated closing costs.
The lender will review a credit report and request credit scores. There will be three such scores and the lender will throw out the highest and lowest scores, using the middle score for qualifying purposes. Lenders typically ask for a minimum 620 credit score in order to qualify.
When a property is identified and the borrowers have a signed sales contract, they send a copy of the contract to the lender. The lender then orders an appraisal as well as a Case Number from the Department of Housing and Urban Development, or HUD. This unique identifier will remain attached to the file throughout the life of the loan. The lender will also order a title report, which will show the history of ownership of the property, any current and previous lien holders and any outstanding judgements or other such liens against the property.
Once the file is fully documented it is then transferred to the underwriter. The underwriter will review the entire loan file making sure the loan package adheres to the prescribed FHA guidelines. Once the review has been completed and approved, the loan is then electronically delivered to the settlement agent who will oversee the loan closing. At the closing, the settlement agent provides both the buyers and sellers with their paperwork, requiring signatures and initials per the lender’s instructions. As the papers are signed they are returned to the lender for review.
As the lender makes the determination the loan has been signed properly and sufficient funds have been delivered, the lender provides the settlement agent with a code called a “funding number” which releases the held mortgage funds and the loan is recorded.
Learn more things buyers should know about FHA loans here.
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