Though the approval process for FHA loans is similar to traditional mortgages in many ways, there are a few noteworthy differences. FHA loans aim to provide a viable option to people with lower credit scores who wouldn’t be approved for standard mortgages. Because of this, interest rates and the cost of insurance tend to be on the pricier side. Let’s learn about the five steps of the approval process for FHA loans:

1. The Preapproval Process

Though not explicitly required, being pre-approved for a loan not only gives borrowers the knowledge of how much the FHA is willing to loan them, it also gives them a competitive edge in today’s cut-throat real estate market. With this step completed before starting the house hunt, the FHA lets the borrower know how large of a loan they qualify for so that it can inform them while looking for a house within their budget. This is also a part of applying for a traditional mortgage.

2. The Loan Application

This step almost always happens once the borrower finds a property they’d like to place an offer on. Once the loan applicant provides the property address, the FHA researches the address to ensure the offer amount is reasonable and that there aren’t any outlying debts or other active loans from other lenders. The FHA will also occasionally ask the loan applicant to pay a mortgage application fee, but this happens on a case-by-case basis.

This step is the lengthiest part of the process and is often very tedious as there are many details to iron out. It requires great attention, diligence, and truthfulness from both parties. It’s possible and even wise to have help for this portion of the application by hiring a mortgage professional or lawyer if required.

3. The Appraisal

Appraising the property in question allows the FHA to ensure the property's price tag is justifiable and inspect for any damage that hasn’t otherwise been disclosed. By determining the property's resale value, the FHA protects itself should the borrower default on their loan.

If the residence appraises at or above the offer price, the loan application will move to the next step. If it appraises at a lower price than the offer, there are three options from here:

●      The seller can agree to lower the property’s price to match the appraisal amount.

●      The loan applicant can accept the loan that covers up to the appraised amount and cover the rest of the property cost, either with another loan or out of pocket.

●      The loan applicant can pull their offer out of the house and walk away.

There isn’t much wiggle room if the appraisal is lower than expected, leading to a stressful choice. The second option is the worst out of the bunch because the loan applicant will have to come up with the money they may not have available and might be overpaying for a property that is not worth their investment. Often the seller leaves “wiggle room” in the selling price and will offer to lower the cost. If neither the first nor second option is available, the last option is to walk away and find a more affordable option.

4. Underwriting

Often considered the most frustrating part of the loan application process, the underwriting step is once all the information for the application has been submitted and is being reviewed. The borrowers are not involved in this part and often feel helpless during it. The underwriter litigiously reviews everything – credit scores, work history, income, bank statements, and more – to ensure the borrower is a quality candidate for a loan.

If there is a concern with the application, the borrower has to provide further documentation, called letters of explanation, to clear up any issues the underwriter has. If the borrower is honest and provides the explanation letter quickly, this will often take care of any concerns.

Suppose the underwriter discovers serious issues with the application, such as a history of criminal activity, fraud, substantial outstanding debts, or other concerns. In that case, the underwriter will often cancel the loan application or ask the applicant to either have a cosigner or place the loan in another person’s name entirely.

5. The Approval!

Once the underwriter carefully reviews the application and clears every detail, all that’s left is to sign on the dotted lines and provide the closing costs. Once the borrower completes those actions, they are officially the property owner and receive the keys to move in.