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6 Secrets How to Apply for a FHA Loan

Federal Housing Administration or guaranteed FHA loans are getting more popular by the year. Today, about 20% of US mortgages are government guaranteed FHA loan programs. This guarantee makes it more possible for conventional lenders to extend credit to people with a lower credit score and/or income.

While you apply for a FHA loan is not very difficult for many Americans, there still are some common problems that might crop up during the underwriting process. There is no fee to complete an FHA loan application. To ease your FHA loan approval process, we want to let you in on some guaranteed FHA loan secrets:

#1 Property Condition Matters

You may not buy any junk house with an FHA loan. The appraiser has to report in his professional opinion that the home is in livable condition. FHA does not want to insure loans on any property that could jeopardize the health and safety of those in the home. If your home needs a lot of repairs, FHA may not loan on the property.

If you can't get the seller to make repairs you want and need, you may have to look at other options. One way is to get an FHA 203k streamline loan in addition to the regular FHA loan. You may borrow as much as $35,000 over the buying price to have any repairs done. When you apply for a FHA mortgage, you need to know that the Department of Housing and Urban Development does consider the condition of the property connected to the loan.

#2 Low Appraisal

Your appraiser will make an estimate of the market value of your property. The estimate will be based upon the features of the home and how it compares to similar homes that have sold in the area recently. If the appraisal comes in below what you want to finance, FHA will not lend on the home; the FHA will not lend on homes where you are borrowing more than the appraised value.

In this case, you should not try to put more money down; paying more than the home is worth is a bad idea. Instead, you should try to lower the asking price of the seller. Many other buyers the seller talks to could be in the same situation, so he may be willing to deal.

#3 Debt to Income Ratio too High

If your total debt payments including your mortgage payment eat up too much of your income, FHA may nix the deal. If you end up with a problem getting a mortgage due to excessive DTI, try to have the lender run your application through TOTAL, the automatic underwriting system.

This process is quite fast. You may be able to make up for your high DTI with some other compensating factor. For example, if you put down another $10,000, FHA may approve you. Or, show that you have several thousand dollars of cash reserves, and you may get the go ahead.

#4 Self Employed Income Can Be Tricky

You should be able to get a loan if you are self-employed in many cases but working for yourself brings added complexity to the application.

When you apply for the loan, you will likely need to show any W-2 you and your spouse have, if any. And you will need to show two years of tax returns. What can get tricky is that the approved FHA lender wants to see proof for the last two years that you had sufficient income to pay the mortgage payment you are proposing.

But what if you took $50,000 in tax write offs last year and only show a taxable income of $15,000? Then the lender may say your income is too low to support the payment on the home, even if your current year to date income is much more.

The best thing to do here is to simply reduce the number of tax write offs you take at least a year before you buy a home, or maybe two years. You will end up paying more in taxes, but this is better than not being able to buy your dream home, right?

#5 Low Credit Scores Ok, But...

One of the big advantages of the guaranteed FHA loan program is that you can usually be approved with a low credit score? How low? It is not unheard of to get approved with a 550 credit score (we know people who had a Chapter 7 bankruptcy in the last year who have a score higher than that. (See FHA mortgages for poor credit).

It is true that FHA does not put a strict limit on how high your score must be to get approved and that is why many people call this the best second chance loan option for the average American. But many FHA lenders will do so. Some lenders may not approve you for a loan with a score that low.

You also may not be able to get approved for the lowest down payment option – 3.5%. It depends upon the lender, once again. Generally, it seems today that you need a 620 credit score at least to qualify for a 3.5% down payment FHA loan.

The best option here is to shop around with many FHA approved lenders if you have a low score.

#6 About FHA Mortgage Insurance

We like the simplicity when you apply for FHA loans, but the current policy is that you must pay for mortgage insurance always – even when you have well over 20% equity in the home. This makes no sense at all. Why should you have to pay for mortgage insurance if you have a large stake in your home?

Still, we like the FHA program. We would recommend using the FHA loan until you get near 20% equity. Then, make sure your credit score is high enough that you can qualify for a conventional loan and refinance. Of course, if rates are too high, you may have to wait to refinance. Once you have enough equity, it makes sense to remove PMI from a FHA mortgage.

FHA guaranteed loans are great products, and we recommend them for many customers. Keep the above six secrets in mind and you should have a great FHA financing experience. The FHA loan is a good option because you can qualify with a high debt to income ratio, low credit score, and they don't even care if you had a bankruptcy more than a year ago. provides a news and information service by offering editorial content related to the housing and mortgage industry. FTHF does not guarantee FHA loan applications and has no affiliation with HUD, the FHA or any other government agency. This website is not responsible for the accuracy of information or responsible for the accuracy of the rates, APR or mortgage guidelines posted by advertising banks, lenders and brokers.

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