Homebuyers often choose Federal Housing Administration (FHA) mortgages because they allow low down payments and do not require perfect credit. The homeowner does not obtain an FHA loan directly from the FHA. Homebuyers work with FHA-approved lenders who ensure that the homeowners qualify for an FHA-approved mortgage. Lenders review the mortgage application and conditional loan for all missing items prior to fully approving the mortgage. Loan conditions are simply items missing from a complete mortgage loan application.
FHA mortgages require that lenders verify the homebuyer's ability to repay the mortgage note. Mortgage lenders request copies of the borrower's pay stubs, W-2s and tax returns, which they use to calculate the borrower's income. Lenders also review and verify the borrower’s employment history and stability. If the lender requires additional documentation or if insufficient documentation was initially provided, then the lenders condition the loan for acceptable employment or income documentation.
As of 2011, FHA requires homeowners to provide at least a 3.5 percent down payment when purchasing a home. FHA requires lenders to verify the source of funds used for the down payment. Often lenders condition for bank statements or investment statements. Borrowers may use retirement funds as their down payment but lenders require they provide proof the borrowers liquidated their retirement account prior to close. Borrowers may also receive a gift from a relative, employer or nonprofit agency, which the lender verifies through a gift letter, and proof the donor has the funds to give.
FHA requires every loan include an appraisal from an FHA-approved appraiser. The appraiser visits the home, photographs the home and prepares a report, which compares the subject property to other recently sold homes in the neighborhood. Occasionally the lender requires clarification on something in the appraisal and conditions the loan accordingly. FHA also requires a copy of the title insurance policy verifying the homeowner was placed on title at close.
FHA reviews the credit history for all borrowers who wish to be on the loan. Sometimes credit reports contain inaccurate information, which must be clarified. Sometimes the lender conditions for items from the borrower, other times a condition is ordered for items directly from the credit reporting company. Homebuyers who are a junior, senior or have a very similar name to other family members often find their credit reports contain inaccurate information. Sometimes correcting this is as simple as obtaining an affidavit from the borrower and the relative. Other times lenders research the inaccuracies and obtain documentation directly from the parties misreporting the data.