The FHA approval process for mortgages is similar to that of conventional mortgages, but there are distinct differences. Because the FHA process is designed to ensure that people with lower credit scores be successful in gaining a mortgage, the interest rates tend to be higher, and the cost of insurance is also more than with standard mortgages. The following five steps are all part of the FHA approval process:


1. The Preapproval Process



While not strictly required, the preapproval process is important because it gives the borrower a "heads-up" on the overall financial situation. The FHA will tell you how much they're willing to lend you if you qualify for such a loan. The borrower would do this prior to beginning the search for a property. In this case, this first step is identical to the standard mortgage process.


2. The Loan Application



In almost all cases, this step happens after the borrower finds a property and bids on it. This is because the borrower must put the address of the property on the form so that the FHA can research the property to see if the amount is warranted, there are any outlying debts on the property, or even if there are other liens on it from other lenders.

Sometimes, the FHA will ask the borrower to pay a mortgage application fee, and whether or not this happens depends on each borrower's situation. Whether the borrower has to pay this fee or not, the process is long, drawn-out, and tedious. Every part of the application form requires diligence and truthfulness. Generally, it is wise for a borrower to get help in filling it out from either a mortgage professional or, if required, a lawyer.



3. The Appraisal



This is what the FHA does to ensure not only that the asking price is reasonable but also to determine if there's anything wrong with the property. While seeming magnanimous, the FHA is really looking out for itself by determining the resalevalue of the home if you default. 

If the property appraises at the level of the offer or higher, then there will likely be no issue. If it appraises lower than the offer, that will be a problem. If this happnes, there are only three viable options:



  1. The seller can lower the price to the appraised value.

  2. The borrower can get the loan for the appraised price and cover the rest out of pocket or with a separate loan.

  3. The borrower can walk away.



It must be stressed that these are the onlythree options. No. 2 is the least attractive from the point of view of the borrower because it means the borrower will pay more for the home that it is truly worth. Many times, the seller will lower the price because sellers generally increase the price to leave a little "wiggle room." If the seller won't "wiggle," then the only option, really, is to find a new property.



4. Underwriting



This is the most frustrating step for borrowers because they are helpless during it. The underwriter will look at everythingbefore making a decision. That includes credit scores, income history, work history, spending habits, and anything else they can think of. 

If the underwriter has a concern, the borrower will likely have to provide documentation of one thing or another. These documents are called letters of explanation. Many times, they will do the trick. All the borrower has to do is be completely honest and provide the letters in a timely manner.

If, however, the underwriter discovers a serious problem, such as a gigantic debt, criminal history of fraud, or other such deal-breaking issue, that will be that. Should this happen, the borrower has to fix up the problem first, if that is even possible, before proceeding. In the case that the serious problem cannot be fixed up, the borrower will likely have to have either a cosigner on the loan or have the loan processed in someone else's name.



5. The Approval!



Once the underwriter gives the "go-ahead," everything is done but the final signatures and closing costs. Once the borrower completes those, the ownership transfers and the borrower gets the keys to move into the new home.