Requiring less stringent credit and down payment requirements than conventional loans, home loans offered by the Federal Housing Administration have dramatically increased since the mid-2000s, according to the Home Buying Institute. While FHA loans share several similarities with conventional mortgages, the process required to receive final approval -- clear to close -- for FHA loans has several differences. These differences can affect the time needed to close on a home purchase.
The FHA created programs for affordable home loans, offering guarantees that participating lenders will recoup money in case of loan defaults. Participating lenders work with prospective borrowers, from the initial loan application to the underwriting and final approval of FHA home loans. Participating lenders use the FHA’s underwriting procedures and guidelines. While the FHA has established the programs, final approval and funding decisions are made by participating lenders, not the FHA.
To process loan decisions, the FHA requires certain unique documents to be included with applications. The Important Notice to Homebuyers provides an overview of FHA loans, outlining important information such as mortgage insurance requirements and interest rates. The For Your Protection: Get an Inspection document reinforces the importance of obtaining a home inspection when purchasing a home. The Informed Consumer Choice Disclosure Notice provides borrowers with a comparison of a sample FHA loan and a conventional loan, highlighting differences in costs between the two types of loans. The Amendatory Clause and Real Estate Certification document addresses how the value of the home should not exceed its appraised worth. The Energy Efficient Mortgage Disclosure informs prospective buyers on the ability to make certain specific home energy improvements and include the cost of those improvements in the mortgage. The last document -- the FHA Arm Disclosure -- only needs to be included if the proposed mortgage is an adjustable rate mortgage loan.
After receiving a completed application package, the FHA-approved lender is responsible for underwriting the home loan for final approval and issuing a clear to close using the FHA’s guidelines. In addition to reviewing the accuracy of the documents submitted with the application, the underwriter will verify financial documents, such as bank statements or pay stubs, to verify the prospective borrower has been continuously employed for three years and has sufficient income to afford house payments. The underwriter will also review bank statements and other documents to determine whether the buyer has enough money to pay for the down payment and closing costs. The lender will also determine that the borrower has no outstanding debts with the federal government that would bar participation in the FHA program, including unpaid student loans or unresolved tax debts.
Once all of the necessary documents have been reviewed and confirmed and are accepted by the lender, the underwriter will issue a clear to close. The final amount of money the borrower needs to bring to the closing meeting will also be determined and calculated. The buyer can pay final settlement costs with a cashier’s check or with a wire transfer at the closing meeting.
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