How to Get Pre Approved for an FHA Loan
If you are thinking about buying a home, one of the first steps in the process is to have a discussion with a lender and to get pre-approved. In fact, most realtors will not spend the day looking at homes with you until you have a pre-approval in hand. Getting pre-approved for an FHA loan is a fairly simple process.
To get pre approved for an FHA loan, you will need to have a conversation with an FHA lender. They will run your credit report, will analyze your income and asset documentation, and will weigh it against your monthly liabilities to determine how much you will be able to borrow.
Documentation Needed for Your FHA Pre-Approval
The FHA lender will be looking at the following documentation as part of their pre approval process.
- Drivers license and/or social security card
- Recent two months pay stubs
- Tax returns and W2s for the past two years
- Your monthly liabilities that show up on your credit report (*see below).
- 2 months bank statements showing the total amount that you have for your down payment.
- Verification of employment
All of this information above will be used to determine what your maximum loan amount is for an FHA loan today.
*Monthly Liabilities – On your credit report, you will see a column which indicates what your minimum monthly payment is for all of your liabilities. You may see a car payment and minimum required payment for your credit cards. Add all of these monthly payments together and that will be your total monthly liabilities.
The FHA Pre-Approval Process
The FHA pre-approval process involves the following steps:
- Find an FHA lender – click here to do that
- Speak with an FHA lender well before you start searching for a home
- Provide last month’s pay stubs to the lender
- Provide the last 2 year’s tax returns and W2’s to the lender
- Provide the last 2-3 months bank statements to the lender
- The lender will run your credit through the three credit agencies
Once you provide the information referenced above, the lender will input your income, assets and liabilities into their loan origination system to determine your maximum loan amount.
Critical Information You Must Know About FHA Loans
Before you continue your journey into getting an FHA pre-approval, it is very important that you understand the process, the costs, and what you can expect. We suggest reading these four articles before speaking with another FHA lender.
How Does the Lender Decide Whether You are Pre Approved for an FHA loan?
The lender will decide whether you are pre-approved for an FHA loan by analyzing all of the information that you provided.
First, the lender will run your credit report to see what your scores are but also to understand what your monthly payment requirements are. This information gets uploaded from the credit agencies into the loan officer’s loan application software.
Then, the lender will review your income levels to make sure they are high enough to support the proposed monthly mortgage payment (principal, interest, taxes, and insurance) plus any other monthly obligations. All of those payments should not exceed 43-50% of your gross monthly income.
Next, the FHA lender will use those ratios above to determine what the maximum loan amount can be based upon your debt to income ratios.
The lender will also look at what you have set aside for a down payment. Although your income levels may be high enough for a large loan, if you do not have the down payment of 3.5%, then you may be limited by how much you can get pre-approved for. Keep in mind you an also get a gift from a relative to cover your down payment.
The next step is for the lender to run your scenario and all of the information that you provided through the automated underwriting system. If everything is within the FHA guidelines, then the system will deliver an automated approval.
How Long Does it Take to get Pre Approved for an FHA Loan?
The FHA pre-approval can be done in one day if you provide the lender with the documentation that he or she needs quickly. Providing only some of the documentation that the lender needs will only delay your pre-approval.
Other Financial Factors in the FHA Pre-Approval Process
There are a few things that may have an impact on your total pre-approval amount. One of the largest factors will be the annual taxes for the property that you plan to purchase. When the lender creates an initial loan scenario, they will use the average tax rate for the area where you plan to buy a home.
The higher the property taxes, the less you can borrow. If the home that you find after your pre-approval has high taxes, it may result in an adjustment to your loan amount or maximum purchase price.
Another factor will be the monthly liabilities and any collections that may show up on your credit report. The higher your monthly liabilities, the less you will be approved for when applying for an FHA loan. Examples of these monthly liabilities are car payments and monthly credit card minimums.
Why Would the FHA Pre-Approval Get Denied?
FHA loans are easier to qualify for but not everyone who applies for an FHA loan will get approved. These are a few of the reasons we have encountered which resulted in pre-approvals getting denied:
- A bankruptcy within the past two years
- A foreclosure within the past three years
- No two-year work history
- Unable to document income or income that is documented is too low
- The proposed property to be financed is not the primary residence
- No down payment
- Credit score below 500
These situations above occur but in some instances like the down payment issue, there are ways to still get the financing that you need. Click to connect with an FHA lender who can help with your pre-approval.
What is the Difference Between a Pre-Approval and a Pre-Qualification?
Typically, a pre-qualification will involve reviewing your income and asset information plus a quick credit check. From there, the lender will give an estimate as to what you can qualify for. However, a pre approval involves taking the additional steps of running the scenario through the automated underwriting system to get a true approval.
If you are beginning the process of shopping for an FHA loan, then it is important to speak to a lender well in advance. This will allow for time to correct anything that is negatively impacting your credit, or will provide you with more time to secure the down payment needed. Our FHA lenders can get you pre approved within 24 hours after you provide them with all of the necessary documentation.