FHA insurance provides a guarantee to the mortgage lender that the lender will not lose money on the mortgage loan. HUD agrees to buy any property associated with a defaulted mortgage loan. For example, if you take out an FHA mortgage loan and two years later you stop making the required payments, HUD will pay the mortgage off completely by buying your home from the lender in a foreclosure auction.
Because of the FHA insurance, mortgage lenders can issue FHA loans to borrowers who otherwise would not qualify for a conventional mortgage loan. HUD allows borrowers with poor credit scores and low down payments to qualify for FHA loans. The minimum required credit score is 500, and the average down payment requirement is just 3.5 percent for borrowers with credit scores of at least 580. Those with lower scores may have to pay 10 percent down.
Only certain mortgage lenders can issue FHA-insured mortgage loans. The HUD website has a current list of all FHA-approved mortgage lenders and brokers (see Resources), and only lenders and brokers that appear on that list can process FHA mortgage applications. If you want an FHA loan, the easiest way to initiate the process is to use the HUD website to locate an FHA-approved lender in your area.
The first step in the FHA mortgage approval process is called pre-approval. This step involves the lender reviewing a preliminary application and informing you how much mortgage loan you can afford based on your income and credit score. Then you will enter into a contract to purchase a home. The lender will verify that the purchase price is lower than the FHA mortgage limit in your area. The final step is called the loan closing or settlement, and this typically takes place in a title company's office with your mortgage lender or broker present.
The FHA mortgage approval process can vary slightly depending on whether your lender is a Direct Endorsement (DE) lender. DE lenders can process and approve FHA applications without specific HUD approval, but non-DE lenders must submit the final application to HUD for approval before closing. The FHA mortgage approval process is therefore a bit easier, and usually a bit quicker, with a DE lender.