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The U.S housing market is doing very well, with prices soaring and the inventory of unsold homes at a record low, according to data collected by research firm Trading Economics.
But not everybody has the down payment or the credit score needed to buy property, especially as lenders tighten credit due to the pandemic and ensuing recession.
That’s when a mortgage loan through the Federal Housing Administration can help. It can make buying a home easier, because it offers three major benefits: a low down payment, low closing costs, and easy credit requirements.
“It’s a great program to get into homeownership, and it’s really popular with first-time homebuyers who haven’t had the opportunity to save a ton of money for a down payment,” says Faylen Silva, a real estate agent in Hidden Valley Lake, California.
An FHA loan can be issued with just 3.5% down, as opposed to 20% for a regular mortgage. But with an FHA loan, the money to buy your home doesn’t come from the FHA — it comes from an FHA-approved lender. And there are hundreds, even thousands of them, to choose from.
That makes it all the more important to do your research and ask the right questions when you’re shopping around for an FHA mortgage lender. Finding one where your application will be followed by someone knowledgeable in the intricacies of the program is key.
“You need a loan officer who knows how FHA loans work,” says Andrew Finney, a real estate agent with King Realty Group in Las Vegas, Nevada and real estate YouTuber.
How to Find the Best FHA Mortgage Lender
While you’re shopping for a mortgage, you’ll likely come across different types of lenders, including both online and local banks, each with their own perks and features.
One way to narrow the list: think local. To start your search for an FHA mortgage lender near you, use the Housing and Urban Development’s lender list tool. Type in your city or zip code to get a list of FHA-approved lenders in your area.
You could also ask a real estate agent who knows your market. “I do always try to point people in the direction of speaking to someone local,” says Silva. “Real estate agents usually work with a lot of different types of lenders and we know who will get the job done.”
Once you have an initial list of lenders, one of the best ways to find out whether a lender is reputable is by doing a simple Google search and looking at their reviews.
Reach out to lenders who make your final list, and schedule a consultation either over the phone or in person to better understand your options and see if they’re a good fit for you.
“Look at different options because lenders vary in what they can offer. There are specific city and state loans to look out for, and it’s important to gain clarity on the differences between online and local lenders,” Finney says.
8 Questions to Ask an FHA Mortgage Lender
Before you move forward with a mortgage lender, here are eight important questions to ask.
1. How Experienced Are You With FHA Loans?
Lenders that provide funding for FHA loans have to be pre-approved. But even among those, you want to find one with experience that’s relevant to your situation. Specific nuances, such as minimum property standards, are an important factor here.
Working with an experienced FHA mortgage lender also helps get through the process faster. Additionally, some FHA-approved lenders participate in down payment assistance (DPA) programs that are specific to your state. Ask lenders if they participate in any and see if you qualify. Here’s a list that can help you in your search for an FHA down-payment assistance program or grant.
2. Which FHA Home Loan Best Fits Me?
There are several FHA home loans to choose from, such as FHA purchase loans, FHA rate-and-term refinance loans, FHA cash-out refinance loans, FHA streamline refinance loans, and more.
So, after you share your information and goals with lenders, one of the first questions you should ask them is which FHA home loan is best for you. A good FHA mortgage lender will explain what your options are and give you a recommendation.
3. How Does a Rate Lock Work?
A rate lock freezes your mortgage interest rate until the loan closes. Rate lock policies vary by lender, so be sure to ask about it. Typically, it’s offered after the initial loan application has been approved, but before the underwriting process, during which a lender verifies a prospective borrower’s income and assets.
That’s also when you’ll want to ask if there is a fee and about available rate lock periods. Typically, lenders will lock your rate for 30 to 60 days, but this period can sometimes be shorter or longer, depending on the lender.
4. What Are My All-in Costs?
In addition to paying lender fees, you’ll face other costs — and you’ll want to know what they are. The extra costs that come with buying a home can easily eat into your budget, and it’s never a bad idea to ask your lender to break down the all-in costs for you.
By asking your lender this question, you’ll have a good idea of how much you’re going to be paying out the door. The costs you’ll want to pay attention to are your down payment and closing costs (2% to 5% of the loan cost). Typically, the buyer’s closing costs include loan origination, appraisal, attorney, insurance, inspection and application fees, plus property taxes, FHA’s mortgage insurance premium, and homeowners insurance. Loan origination fees vary by lender but you never should pay more than $14,000, says Finney.
5. Will My Loan Have Any Prepayment Penalties?
Loan prepayment penalties are fees lenders might include in their terms to ensure you pay a certain amount of interest on your loan before paying it off.
That means paying your loan off early could actually cost you more.
While you’re talking to lenders, ask if they include prepayment penalties in their loan terms. You want to avoid them if so, says Finney.
6. Do You Charge Points?
Mortgage points are a percentage of your loan paid upfront that consequently lowers the interest rate. Ask your lender whether they charge points, and how much they cost if they do. If you don’t want to pay, see whether you can opt out.
7. What’s the Loan Estimate?
Ask for several loan estimates from different lenders so you can compare and choose the loan that’s right for you. It’s a document that tells you important details about a mortgage loan you have requested.
Make sure certain details on the loan estimate are correct and that it reflects what you discussed with the lender, such as the amount you’re borrowing and whether your rate is locked. Use NextAdvisor’s loan estimate example as a reference.
If an aspect of the loan estimate looks different from what you expected, ask the lender to explain why.
8. What’s the Closing Time Frame?
Typically, FHA loans take around 30 days to close, but it can take up to 45 days. When you’re talking to lenders, ask them what their average closing time frame is. The lender you choose to work with should know the ins and outs of what the FHA will accept, so knowing upfront how long a lender might take to close can help you know what to expect.
If you have a specific date or timeline you need to stick to, this could play an important role in what lender you work with.
“Getting an upfront picture of what to expect to pay and how long the process will take is really important,” Silva says, “because your lender plays a vital part in getting you to the closing table.”