The Federal Housing Administration (FHA) offers loans to make homeownership more accessible to those in low- to middle-income households. They’re called FHA loans, but not everyone qualifies for them.
This article explains the step-by-step process of applying for an FHA loan in California, including FHA loan requirements, limits, required documentation, and more. Ultimately, you’ll be ready to contact us to kickstart your California home search.
California FHA Loan Limits
California FHA loan limits are the highest value you can take on an FHA loan. They vary by county and change yearly based on fluctuating property values. Typically, you can expect a $498,257 FHA loan limit for a single-family home in California.
However, select counties have an even higher FHA loan limit based on the high property values. Los Angeles, San Francisco, Orange, Alameda, and Contra Costa are the most expensive in the state, with an FHA loan limit of $1,149,825.
Consult your lender if you have any questions about the loan limit. They can help you navigate the complexities of FHA loans.
Step 1: Check Your Eligibility for FHA Loans
Not everyone qualifies for an FHA loan, so you’ll want to check your eligibility before you start. If you do not qualify, you must explore alternatives (such as conventional loans), which may have less forgiving terms.
Credit Score
You need a credit score of at least 500 or higher to qualify for an FHA loan. However, you must put down at least a 10% down payment with credit scores of less than 580. You could qualify for a lower down payment if your credit score is 580 or higher.
Lenders use your credit score as a significant factor to assess your creditworthiness. While it’s only three numbers, it tells a detailed story of your financial history, including your payment history, credit utilization, credit history, types of credit you have, and any recent credit inquiries.
While it’s not the only financial factor lenders consider, it is big. Your credit score can be a good indicator of whether you will pay your loan on time, and it will impact your loan terms, rates, and more.
Income and Debt Verification
Your debt-to-income ratio (DTI) breaks down how much you owe against how much you earn. An FHA loan in California requires that your DTI not exceed 43% (the lower your DTI, the better).
This helps lenders determine if you can afford the mortgage payment against your outstanding debts. You must demonstrate your employment history and income, including your bank statements, tax returns and W2s for the last two years, paycheck stubs, and other proof of income.
Thankfully, if you pull these documents together to prequalify, you will have them handy during the application process.
Property Requirements
If you’ve already found a home, you want to ensure it meets an FHA loan’s property requirements. The property must be a single-family home used as a primary residence. It can be a manufactured home, and select condominiums may meet the requirements.
If you have a question about whether your property is eligible, contact your real estate agent or mortgage lender. Not all are familiar with FHA loans, so choose a lender who understands the requirements.
Step 2: Get Pre-Approved
Now that you’ve confirmed that you qualify for an FHA loan, the next step is to get pre-approved. This stage involves submitting your financial information to a mortgage lender, who will tell you the maximum loan amount you can qualify for.
Benefits of Pre-Approval
There are many benefits to getting your pre-approval letter:
- Solidify your buying power: You know what you qualify for when you start your search, so you won’t fall in love with a house you can’t afford.
- Streamline the process: You don’t have to wait to get your qualification letter when you’re ready to put in an offer.
- Demonstrate seriousness to sellers: California’s market is highly competitive. Sellers know you can back up your offer with your pre-qualification letter, and you’re not just wasting their time fantasy shopping.
You don’t have to wait to start looking, but having your pre-qualification letter on hand can help during the homebuying process.
The Pre-Approval Process
The length of the pre-approval process depends on many factors. Typically, you can expect an answer within ten business days, though some can respond quicker.
You must share your income information, assets, and debts with your lender. The information that factors into your DTI will help your lender understand your financial history. Throughout the process, they may ask for additional documentation and verification. But don’t worry — your lender is simply doing its due diligence.
Step 3: Find Your Home in California
California is a beautiful and exciting state to live in. Here are some tips to help you find your home with the help of an FHA loan:
Narrow Your Search
First, you’ll want to narrow your search within the state to help you get started.
- Consider your needs: How many bedrooms do you require? How many bathrooms? Do they need to be full or half? Do you need a yard? Commuting distance to work? Access to public transportation? You should account for these and other factors as you consider your needs.
- Stay within your budget: Remember the amount you prequalified for, but also factor in property taxes, mortgage insurance, HOA fees, and other additional fees.
- Identify your preferred locations: Different counties can feel like another world, so research which one you’d like to live in.
Be specific in your search, yet open to properties that may not meet your specifications. Your agent’s job is to find you a home, so they may have some aces up their sleeves.
Work with a Knowledgeable Agent
Next, you want to work with an agent familiar with FHA guidelines and the California housing market. Not all agents are well versed in the complex requirements of FHA loans, so confirm their experience before working with them.
Step 4: Submit a Loan Application and Underwriting
Loan pre-qualification is a great first step. However, you must submit a loan application once you’ve found your home. This application undergoes an underwriting review so your lender can consider it more closely.
Formal Application
Even if you are prequalified, you must provide a series of documents as part of the formal application process. Lenders need to ensure you have no significant changes in your credit since they prequalified you.
- Two years worth of tax returns, W2s, and 1099 statements
- Two months’ worth of paycheck stubs
- 60 days worth of bank statements (for all accounts)
- Gift documentation if applicable. Gifts must be from a family member, charitable organization, employer, or friend to qualify for FHA loans.
- Other forms of income (investments and other asset information)
Essentially, you want to provide enough documentation to prove you are a good candidate for the loan.
Underwriting Review
Once you submit your paperwork, your lender will carefully examine your financial situation and credit. During the process, they may ask additional questions or require additional documentation.
All FHA properties must undergo an FHA home appraisal to prove their market value. Lenders use this information to determine the property’s loan-to-value ratio. You will not receive the full amount if the loan request exceeds the home’s value.
Step 5: Closing on Your FHA Loan
Once your FHA loan application has been approved, you are one step closer to getting your home. Here are the steps to closing on your FHA loan:
Closing Costs
FHA loans carry their closing cost requirements in addition to the standard fees:
- Upfront Mortgage Insurance Premium: You’ll need to pay 1.75% of the home’s purchase price, though you may be able to finance that into your loan. Remember that it will make your mortgage more expensive because you must also pay monthly mortgage insurance premiums. All FHA loans must carry FHA mortgage insurance as part of the loan terms.
- Origination fee: This is the cost of creating the loan. It can range from 0.5% to 1% of the total loan amount.
You should expect to pay between 2% and 6% of your total loan amount in closing costs. However, you can negotiate with the seller to pay some of the standard lender fees on your California FHA loan.
Final Walkthrough
Before you sign any contracts, you should do a final walkthrough of the property. Ensure all items are out of the home unless otherwise agreed upon. Additionally, you should check that all appliances were left as agreed upon.
If the house is not as you expected, it could delay closing until the issues have been resolved.
Become a Homeowner
Congratulations! You became a homeowner as soon as you signed on the dotted line. Now comes the fun part of making the house your home. Your lenders are proud to have been part of the process with you.
Access California FHA Loans
FHA loans in California are a great way to make homeownership possible for many who otherwise wouldn’t be able to afford it. The Federal Housing Administration backs these loans, making them less risky for lenders to offer to first-time homebuyers and other buyers.
California FHA loans have some nuances, so you must work with a lender who understands the requirements. Thankfully, Arnaiz Mortgage is here to help!
We partner with our clients to help them navigate the FHA loan process, answering all their questions about FHA loan requirements and tailoring loans to help meet their unique needs. Whether you’re just starting to look or have a property in mind, contact us at (623) 806-4645 or tarnaiz@arnaizmortgage.com today to get started!
Your dreams of being a homeowner may be closer than you think.