FHA Loan Process
The FHA loan process is where the rubber hits the road for taking out a loan. What follows are the actual steps borrowers take to purchase or refinance a home.
Just a quick heads up: it’s a good idea to get a pre-approved for a loan before shopping for your dream home. Pre-approvals help you understand the price range of homes you can afford. You will not waste time shopping and falling in love with a home you cannot afford (or that doesn’t meet FHA guidelines). Knowing your price range also hones your online searches when using services like Zillow or Trulia.
In fact, some real estate agents will insist that you are pre-approved before they will assist you with viewing properties. Of course you can start working with an agent and looking at houses without a pre-approval, but getting one will save time and demonstrate that you are a serious buyer.
Being pre-approved not only improves the relationship with your realtor (they will work harder knowing you are likely to get financing) but it helps negotiate with the seller. Being nimble is particularly helpful in fast-moving markets. When there is more than one interested buyer in a particular home, being prepared ahead of time means you can make your move. If sellers receive multiple offers, they are more likely to work with a potential buyer who is prepared.
Below you will find a snapshot of the FHA loan process. You’ll be working with your real estate agent and your loan officer together to move through each step of the mortgage loan process.
Pre-Approval (or Pre-Qualification)
As mentioned, pre-qualification can save you time and even heartache – you won’t fall in love with your dream home only to find that you’re unable get a loan for it. Let’s clarify the difference between pre-approval and it’s little brother, pre-qualification.
Pre-qualification is a basic “at glance” look at a borrower’s financial capacity
A loan officer will look at your finances and employment and either recommend going forward with a program FHA or they might identify another mortgage product (such as a conventional loan). Really, pre-qualification is a friendly conversation. You’ll get some ideas about how to proceed with financing.
Pre-approval is a more thorough look at a borrower’s financial capacity
Pre-approval peeks “under the hood” of a borrower’s credit and employment history. It’s more formal than pre-qualification and results in more certainty about your loan program options as well as the loan amount for which you qualify. Being pre-approved breathes a little fire into your dealings with real estate agents and helps negotiate a fair price with sellers. It usually involves pulling a credit report and filing a mortgage application. There is a small fee for both.
Here are the items you will need to gather up and have at-the-ready for your application. Staying organized with the help of your loan officer will help make this a pleasant and efficient experience. You may not need all the items below; your loan officer will clarify what’s needed based on your unique situation. Here are some items that may be needed:
- Tax returns from past two years
- Current pay stubs
- Name and address of employers for the past two years
- Income statement and balance sheet from your business if you are self-employed
- Checking and savings account numbers
- Social security number
- Information regarding any real estate you currently own
- Information about existing credit extended to you (student loans, auto loans, credit cards, etc.)
- Approximate value of your personal property
At the time you apply, you and your loan officer will also need to list the approximate value of the property you wish to buy (or refinance), the location (by zip code) and the time frame for the transaction.
You will receive a Loan Estimate of closing costs within three days of your application. This includes line items of estimated costs, summarized in one document. It will include the basic summary of the loan terms, escrow requirements and settlement fees. You’ll see things like appraisals, the cost of pulling your credit report, origination fees, insurance and government recording charges. Suffice it to say, there will be several items. Take your time to review each one. Don’t be afraid to ask questions.
The preparation of your application and file full of documents for submission to an underwriter is called loan processing. This step represents the bulk of the paperwork part of the FHA loan process. The loan processor requests FHA case number and start collecting missing information or filling in anything that is incomplete. The verify the borrower’s employment, bank deposits and credit report. If there are any issues with the credit report or other items, letters of explanation may be requested of the borrower. The appraisal is ordered. Escrow instructions (transaction details) are requested and drawn up by a third-party escrow company. Preliminary title reports are requested from the title company to check for any liens on the property that may affect the transaction.
As you can see, there’s a lot that goes on in this step. And very little of it wraps up at the exact same time. So the loan processor keeps track of everything and moves the process forward until the loan file is complete. It’s the ultimate in multitasking. As you might imagine, loan processors are special people.
An independent, FHA-approved appraiser will estimate the property value of the home you’d like to buy (or in some cases refinance). They’ll look at the home’s features like square footage and number of rooms and then compare it to a few other similar properties in the area.
One thing that’s cool about FHA appraisals is that they include an inspection which describes the condition of the property. Appraisers look for any structural deficiencies that would affect the property’s livability. This helps protect borrower’s from the unexpected burden (and buzzkill) of paying for repairs right after moving in.
The report, or Uniform Residential Appraisal Report (URAR), gets bundled with all the other loan docs which are reviewed by an underwriter.
Interest Rate Lock
After you apply, you can lock your interest rate at any time, the timing of which will depend on marketing conditions. Your loan officer and can help you with it.
Your loan file has been packaged by your loan processor; everything is well-organized and pre-verified so that the underwriter has a clean and complete file to evaluate. After submission, underwriters pore over all the contents in the loan file. They verify the borrower’s credit and capacity to repay the loan. They verify the collateral (the property) value and confirm that it is in satisfactory condition.
When everything is thoroughly reviewed, a final loan decision is issued.
Are you still following this? Great! Because out of all this hoopla, one of three possible decisions are made regarding loan approval: Yes, no or maybe.
Yes – You’re all set. You may proceed to the closing step.
No – Unfortunately, your loan was not approved. Your loan officer may have some alternatives for you to consider. It might not be the end of the world as we know it. Keep your chin up.
Maybe – “Yes” and “No” answers are pretty clear. The “Maybe” answer is a type of approval but it’s like purgatory; you’re really close to a final “yes” but not quite all the way home. Borrower Conditions are the things that need to happen before the loan is in the bag. You may be asked by the underwriter to:
- Produce additional, supporting documentation
- Produce alternative documentation
- Explain and/or correct errors and anomalies
- Verify information
- Provide an attestation – an example would be producing a sworn letter from anyone gifting funds
Closing an FHA Loan
Before a closing meeting, lenders prepare the closing documents – the legal paperwork which finalizes the transaction. You have the right to review these documents a day in advance of the closing meeting. This is your opportunity to ask any questions that you may have. Before and during the closing, pay close attention to the information in the closing docs and check for accuracy.
During closing you will sign a lot of paperwork. You should not feel rushed. You may ask any question at any time. Here are few of the key docs you will sign:
Closing Disclosure – this is nearly a mirror image of the Loan Estimate you received at the beginning of this process but all the information is now up-to-date and final.
Promissory Note – just like it sounds, this is a written promise to pay back the loan.
Deed of Trust – this transfers the title of the property to a trustee (a third-party) who holds it until the loan is paid in full.
When all the legal documents that have been signed, date stamped and notarized they will be recorded. Recording is the filing with the county as an official public document. When the money is wired from the lender to the title / escrow or attorney for disbursement, that’s the moment we’ve all been waiting for, the funding.
How Long Does It Take to Get a FHA Loan?
One thing is for sure: markets fluctuate. Say interest rates drop dramatically in a short period of time; this can generate a ton of refinance loan applications all at once. Obviously a lender’s pipeline get a little packed once under those conditions. Summers are typically busier than winters for real estate purchases. All told, even with peak periods for refinances or purchases, the typical loan process takes 30 to 45 days. The highest average time to close a loan in the recent past was 55 days during a busier-than-usual market cycle.