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FHA Lenders: How to Choose the Right One

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When getting a mortgage backed by the Federal Housing Administration, you’ll need to work with an FHA lender. But if this is your first time applying for a home loan or you’re new to FHA loans, you might not know how to choose the lender with which you should work. As you search for home financing, make sure you understand what you’re looking for.

What is an FHA lender?

Institutions that want to originate, underwrite, close, endorse, service, purchase, hold or sell FHA-insured mortgages must apply for approval with the FHA. The process requires lenders to submit an application with the required documents and certify compliance. Lenders must also pay a recertification fee and submit financial data every year they wish to continue being an FHA-approved lender, and some lenders may have to go through an annual certification process.

There may be several FHA lenders approved to work in your area, so Nick Monardo, president of the Arizona Mortgage Lenders Association and vice president of CNN Mortgage, recommended the first question you ask a lender is how many years they have been originating FHA loans.

“A lot has changed over the years,” Monardo said, giving the example of how the Department of Housing and Urban Development overhauled the handbook that includes FHA guidelines. “So you want someone with experience, who knows the new guidelines and can guide you through the process.”

How to find an FHA lender

While you may ask friends and family for a lender referral, the challenge with asking a non-industry professional for advice is that their situation may be different from yours. Your best friend may have had a great experience with a lender who has no idea what to do with your FHA loan.

This is why Monardo recommended speaking with people who have experience with a lender through multiple transactions. For example, your real estate professional might have several good experiences with a few lenders, so they can be a good resource to ask questions about past experience.

Three questions you may want to ask your real estate professional about a lender:

  1. How well do they communicate?
  2. Is the lender good at preparing the borrower?
  3. Is the lender good at setting expectations and laying out the process from origination to closing?

You can also find an FHA lender in your area using HUD’s lender list search tool. LendingTree allows you to browse FHA loan rates in your area, as well as provides reviews of FHA lenders.

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What to ask when choosing a lender

Monardo highly recommended picking a lender that is local to your area. This is because some lenders are licensed in certain states, but are not physically located in that state. If your lender operates in a different state, that would be something you’d want to know upfront.

Also, here are some questions you should ask your lender to find out if they are right to help you with your FHA loan:

  • How many years have you been originating FHA loans?
  • Do you have the ability to manually underwrite?
  • Do you underwrite your loans internally or do you broker it out?
  • What is your mortgage estimate? Rate? Fees?

We’ve already discussed the importance of getting a lender with FHA loan experience, but here’s why the other questions are important.

Do you manually underwrite FHA loans?

Many large mortgage lenders have an automated underwriting system (AUS). In these situations, if you do not meet the requirements they set in their AUS, you may be declined, although you meet all the manual guidelines for an FHA loan.

Some lenders cannot do a manual approval. So you’ll want to ask, “If I don’t get an AUS (automated) approval, do you have the ability to manually approve the loan?” This is particularly important if you have a low credit score.

What are the full costs of my mortgage?

When you look at what your monthly payment will be, it will usually consist of the principal and interest, mortgage insurance, property taxes and homeowners insurance. Use LendingTree’s FHA mortgage calculator to estimate your monthly payment.

Besides the monthly payment amount, you will have to pay lender fees and closing costs. These may include:

  • Down payment. This will be the amount of money you are putting down on the house, and usually includes whatever earnest money you put down.
  • Origination fee. The lender usually charges a percentage of the loan as an origination fee. This is to cover the lender’s expense and profit for making the loan.
  • Lender fees. Common fees that lenders charge may include credit report fees, application fees, underwriting fees, processing fees and administrative fees. These fees are sometimes negotiable.
  • Points. Paying points is when you may pay a fee to reduce the interest rate on your loan.
  • Third-party closing costs. This includes appraisal fees, home inspection fees, termite inspections, title insurance, escrow fees and other costs.
  • Taxes and government fees. Property taxes and state recording fees are not considered part of the cost of borrowing, but you still have to pay them.
  • Prepaid expenses and deposits. Loan interest, private mortgage insurance, homeowner’s insurance and flood insurance are typically placed in an escrow account to cover future expenses.

When it comes to fees and pricing, get at least two to three estimates from different lenders, because costs can vary. The estimates will give you a good idea of the pricing and fees you can expect. The challenge with this is that most lenders won’t give you an estimate unless they pull your credit, and many consumers don’t want their credit pulled that many times. But you’ll need to if you want to compare rates. The good news is that mortgage inquiries made within a two-week period will only count as one hard inquiry on your credit report — credit scoring formulas are designed this way to allow consumers to, among other things, compare mortgage quotes without damaging their scores.

You can also fill out an online form with LendingTree to potentially compare multiple FHA loan offers at once.

What documents do I need?

Here are the FHA loan requirements for 2018. You may also want to take a look at our guide on FHA disclosures.

Here are some of the items you’ll need as you go through the FHA loan process:

  • Fannie Mae Form 1003 or Freddie Mac Form 65
  • Form HUD-92900-A
  • Valid government-issued photo identification
  • Lender authorization form (to verify past and present employment records, bank accounts, etc.)
  • Sales contract
  • HUD-required disclosures
  • Income, employment or asset documents
  • General mortgage credit analysis documents (credit report)
  • Evidence of Social Security number
  • Verification of deposit
  • Verification of employment covering two years
  • Federal income tax returns
  • Wood Destroying Insect Inspection Report
  • Appraisal documentation (confirm the original Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report)

What’s the timeline to close?

Once you find a home to purchase, the entire loan process may take as short as a few weeks and as long as a couple of months. There are many aspects involved in the process, so it’s not always easy to provide a timeline estimate as there are numerous moving parts that can cause delays.

The most common area that takes time is the underwriting process. This is the point where your loan must be reviewed by an underwriter to determine it meets all the eligibility requirements of the lender and HUD. Certainly having all the correct documents needed helps, but let’s say your loan originator missed something crucial, then it takes time to notice it’s missing, inform you and get it resolved. And as we mentioned above, if you’re lender brokers out their underwriting, you can be assured the entire process will take longer.

Additionally, there can be other conditions that are raised during underwriting, such as title issues, employment verification, income verification, sufficient cash reserves and a review of your bank accounts. Anything that needs to be addressed will put a delay in the time it takes to close.


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