There are many different types of home loan programs out there. If you are a first-time buyer who doesn't have much saved up for a down payment, your best option might be working with the FHA. Like every other lender, the FHA has its own particular pre approval process. Understanding how this process works and what you can do to qualify for pre approval is the best way to determine if an FHA loan is the right loan for you. 

Finding a Lender

The first step in preapproval is finding a lender. There are many financial organizations that provide these loans, so a little searching can actually go a long way. Many banks have some kind of FHA-associated program, as do many other types of lenders. If you're not sure whether a particular lender participates in the program, you can check out the Department of Housing and Urban Development website to search for lenders in your area. 


Once you've found a lender, it's best to ask about these types of loans directly, as they do tend to be much more friendly to first-time borrowers than some of the other products offered. Though some might try to steer you elsewhere, insisting on an FHA product will generally meet with little resistance. Once you've found your lender, you'll next start the deep dive into your finances to determine whether you can get the loan.  

Checking Your Credit Score

While this type of loan is known for being available to those with imperfect credit, that doesn't mean that the FHA loan pre approval process won't require a reasonable credit score. Like most lenders, the FHA wants some reassurance that you will pay back your loans. It also tends to offer better rates - and better down payments - to those who have higher credit scores. As such, it's often a good idea to spend some time improving your credit score before you decide to apply for one of these loans. 

The bottom floor for FHA lending is at five hundred. Though you might see some programs that claim to work with people who have even worse credit, the lowest score you can have to get the benefits of an FHA loan really is five hundred. If your score is between five hundred and five-seventy-nine, you will be expected to make a higher downpayment. Unlike those with better scores, FHA borrowers with low scores have to put down ten percent. This is lower than many other loans, of course, but it's not always ideal for the borrower who is looking to put down a minimal amount of money.

If you want to get the full benefit of an FHA loan, you'll need a credit score of at least five-hundred-eighty. Once you reach this point, which is still considered poor or below average by most lending companies, you will only have to put down three and a half percent down when you buy your home. This is significantly lower than the vast majority of down payments that you'll be allowed to put down on the open market, so it's usually worth your time to ensure that your credit score reaches this minimum level before you put in your application.

Checking Out Your Debts

Once the lender is done looking at your credit score, he or she will look deeper at your finances to determine how much money you owe and to whom you owe the money. This is usually thought of as checking your debt to income ratio, and it's a fairly big part of working with the FHA. It's very important that you have a debt to income ratio that's as low as possible to qualify for these loans. In order to get the loan, your debt to income ratio needs to be below forty-three percent.

The good news for most borrowers is that the lenders don't use every penny you make in order to calculate this ratio. Instead, they're looking at very specific types of recurring monthly payments. In most cases, this means looking at things like car payments, student loan debt, and credit car payments. Other debts may be counted here as well, but it's going to vary as to the kind of debt and how your payments plans are structured. The goal, though, is for no more than forty-three cents of every dollar you make to go towards paying these debts. 

It is also important to note that your actual debt to income ratio as determined by the FHA may not be the same as your debt to income ratio as determined by other lenders. The FHA uses a one percent rule for your student loan debts, so it assumes that your payments are no more than one percent of your total student loan amount. This can be good for those who are making larger payments, but problematic for those with larger student loan burdens or for those who are on income-based repayment plans. It's always a better idea to work with this one-percent figure in order to determine your eligibility for being getting a loan and ultimately for getting FHA loan pre approval. 

Looking at Your Income

Calculating that debt to income ratio requires knowing how much mone you and any co-signers make each month. The FHA uses this figure to determine how much money to lend you. In addition, the FHA is very interested in figuring out where your money comes from, likely to determine if you'll be able to keep using that income for the foreseeable future. In most cases, this means that you're going to need to turn over paperwork confirming your employment as well as basic statements about your income. 

The precise paperwork you'll need to turn in largely depends on your source of income. If you are a typical employee, you'll need pay stubs for at least the last two pay periods, as well as your tax records for the last two years. If you own a business or are an independent contractor, you may need to submit income variation going back further. If your income comes from sources other than employment (a trust or annuity, for example), you'll need to verify how long you've received the money and how you're receiving the funding. 

The FHA is also generally quite concerned about making sure that you actually have enough money to make the downpayment on your own. It will accept gifts in some circumstances, but it will not look favorably upon those who take out loans to make the downpayment. If there have been any unusual deposits in your accounts over the last several months, you will have to account for where the money came from and you may actually have to seek out written statements from the parties from who you received the funds. 

Once the lender is done looking over your financials, the organization will take some time to determine whether or not you are eligible for a loan. As with many other mortgages, it's often hard to get an immediate answer. If you find that you don't qualify for one of these loans now, it's generally advised that you work on one of the factors listed above before you apply again. Getting a pre approval isn't always easy, but it might be the best way for you to enter the world of home ownership