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If you’re researching buying a home, you’ve probably heard that you need to put down 10% to 20% down—the closer to 20%, the better. That can be really frustrating for many people.
However, what if there was a way to avoid such a massive down payment? Here’s how you can get an FHA loan with a lower down payment rate in seven steps:
- Research a lender.
- Know the requirements.
- Gather the documents.
- Apply for the loan.
- Give lenders your info.
- Compare loans.
- Accept the best offer!
Now that you have a general idea of what steps to take, you’ll need to follow through with them. If you want to learn about the FHA loan process in more detail, be sure to continue reading.
What’s an FHA Loan?
Before we get further into the steps, you’ll want to know what an FHA loan is. These types of loans come from the Federal Housing Administration or the FHA. They’re an excellent option for those with lower credit scores who still want to buy a home.
FHA loans receive federal backing on mortgages. This backing allows those with lower credit to still own a home. Many of these loans also offer a minimum of 3.5% on the down payment.
This amount is less than a traditional mortgage. It’s a way to enter homeownership with fewer finances.
Overall, you’ll want to consider getting one if you can’t save up enough money for a home down payment. Often 20% is much too high for many families to cover. Instead of giving up on your dreams of owning a home, you may want to consider an FHA as an option.
1. Research a Lender
The very first step is for you to find an FHA-approved lender. Many banks do offer this type of loan, so you should see a good option. You’ll want to research what credit scores they accept before proceeding.
You also want to know what kinds of rates they offer and other information. Make sure to give them a call and browse through their website. It helps a lot to keep a list of everything that you find to compare your lender options more later.
2. Know the Requirements
You’ll need to be familiar with all of the requirements first. Knowing should also give you an idea of whether you can expect the loan to go through or not. Here are the general requirements for your average FHA loan:
Know Your Credit Score and History
Many FHA loans require credit scores with a minimum of 500 to 600. On average, most loans float around a requirement of 580.
As for your history, you’re allowed to have one 30-day late payment in the past year. There also shouldn’t be any signs of foreclosures or bankruptcies in the past three years.
Know Your Debt-to-Income Ratio
The debt-to-income (DTI) ratio is a percentage of your monthly income that goes towards your debts. For example, the amount of money you put towards car loans, student loans, or credit cards.
As a general rule, you don’t want the ratio to go higher than 45%. The lower, the better. Although, individuals with higher credit scores are still likely to receive approval, even with very high DTI ratios.
FHA lenders won’t approve you if they don’t think you can afford to make payments. In general, you don’t want the home payments to be more than 31% of your monthly income.
3. Gather the Documents
There are several financial documents that you’ll want to have for the FHA loan. These financial documents can include any of the following:
- Tax returns
- Bank statements
- Proof of disability or Social Security income
- Name and address of employers
- Your year to date profit and loss statement (self-employed people)
- Credit reports (the lender will pull your credit history)
4. Apply for the Loan
Once you find an FHA lender that meets your needs, you’ll want to apply for the loans. You should request loans from multiple lenders so that you can compare the offers you receive.
Doing so won’t hurt your credit score as long as you apply quickly. To apply, reach out to the lenders and let them know. They’ll provide you with all the information that you need.
5. Give Lenders Your Info
Know that the FHA lenders will ask for your personal information. They’ll want to know your full name, your SSN, income information, employment history, and more. The lender also will ask for your driver’s license or a state photo ID.
Once you’ve proven to be who you say you are, the lenders will move forward with their offer. When you receive them, make sure that you compare all of them. You’ll want to find the best rates for your budget.
6. Compare Loans
The lenders will first send you loan estimates. This document will provide an estimate of your interest rate, monthly home payments, loan terms, the down payment, and any closing costs.
You’ll want to compare all of the loans before deciding on just one. And make sure you can afford the monthly payments. The interest rates are also significant because they directly impact how much the home costs you!
7. Accept the Best Offer!
Finally, you can accept the best offer! Preferably, this would be the option with the lowest interest rates and fees. It would be best if you felt comfortable with the payment amounts.
If you’re still unsure, you may want to read more about FHA’s policies on these loans. I recommend reading the FHA Single Family Housing Policy Handbook from Amazon.com.
This handbook covers eligibility requirements and more.
Is an FHA Loan Right for You?
If you’re interested in owning a house right now, but don’t have enough to spend on the 20% down payment, you can always consider getting an FHA loan. You’ll want to research all of your options, then compare the loan offers.
From there, you can choose a loan that works the best for you. Overall, FHA loans make it easier to enter into the world of homeownership. If you follow the above steps, you’re sure to have a simple time going through the application process.