How to find the best FHA mortgage lender

An FHA loan offers financing to buy a home with a low credit score, as little as a 3.5 percent down payment and a cap on closing costs. But how do you find these miraculous mortgages? Here’s everything you need to know about finding the best FHA lender for you.

How to find the best FHA loan lender

To find the best FHA lender, shop around the usual suspects: banks, credit unions and mortgage companies. The Federal Housing Administration insures these loans, but a private lender offers and underwrites them. You can search for a list of FHA-approved lenders on the Department of Housing and Urban Development’s website (HUD oversees the FHA). Banks and mortgage companies often display their FHA affiliation in ads, too.

Compare your all-in FHA mortgage costs with at least three top FHA loan lenders. Your favorite bank or credit union might already be an FHA loan provider, so check there first.

It might be helpful to enlist a mortgage broker specializing in FHA loans, says Casey Fleming, a mortgage originator team mentor and author of “The Loan Guide: How to Get the Best Possible Mortgage.” A broker should know the criteria and strategies to get your application approved. They might also have access to lenders who don’t work retail — that is, directly with the public — but only through intermediaries like themselves.

Because it can be tough, if not impossible, to eliminate the ongoing mortgage insurance premiums on FHA loans, also consider a mortgage lender who can help you compare the long-term costs of FHA loans versus conventional loans.

Questions to ask FHA mortgage lenders

• Which FHA loan is best for me?

  There are almost a dozen different FHA loan programs. Your lender should tell you which options will be best for you and the pros and cons of each.

  • • Basic home mortgage loan: You can use this loan to buy a one- to four-unit structure you plan to use as your primary residence.
    • FHA adjustable-rate mortgage: Also used to purchase a primary residence, an FHA adjustable-rate mortgage is a type of home loan with an interest rate that changes over time. ARMs begin with a lower fixed rate that lasts from three to 10 years. After that, the rate periodically adjusts.
    • Home equity conversion mortgage (HECM): The HECM is a type of reverse mortgage that enables homeowners to withdraw a portion of their home equity to cover home maintenance costs, repairs or even general living expenses.
    • FHA 203(k) rehab loan: The 203(k) rehab loan is a type of FHA construction loan designed for buying homes that need work. These loans provide buyers with financing for purchasing and renovating a home.
    • FHA energy-efficient mortgage: You can use the funds from an energy-efficient mortgage to pay for various efficiency projects and upgrades. Borrowers using this type of loan must obtain a home energy assessment, which provides recommendations for energy-saving projects.

• What are the current FHA mortgage rates?

  Are the lowest available rates quoted to borrowers updated daily or weekly? It’s vital to know where FHA loan rates stand before applying to determine if the lender is offering an attractive rate and how it stacks up to the competition.
  

• Do you offer down payment assistance?

  Prospective homebuyers who are struggling to save money for a down payment may benefit from down payment assistance programs. FHA down payment assistance programs, which are available from select lenders nationwide, provide loans or grants to help with this cost.
  

• Is there a rate lock available, how long is it and is there a fee?

  Many lenders let you lock in your interest rate for a set period while you’re shopping for a home. This can make the cost of your mortgage more predictable and could be a smart financial move, especially considering mortgage rates have been trending upward.
  

• Are there any penalties or fees to be aware of?

  Some lenders charge a prepayment penalty if you pay the loan off early or refinance. There could be other fees and penalties the lender imposes, too, so be sure to inquire about loan origination, transaction and settlement fees as well.
  

• How long does it typically take to close?

  If you’re on a tight timeline, you’ll want to find a lender who can close quickly or on your schedule. Different types of loans have different closing timelines. As of May 2024, an FHA purchase loan takes 43 days to close, according to ICE Mortgage Technology.
  

• What are the upfront costs?

  Ask your lender what closing costs you’ll have to pay, and whether you’ll need to pay mortgage points to get the rate you were quoted.
  

• Do I qualify for an FHA loan?

  If you have a credit score of 580 or higher, a 3.5 percent down payment and are buying a primary residence, you may qualify for an FHA loan. If you can put 10 percent down, you might be able to apply with a credit score as low as 500. Ask lenders if you meet their individual qualifications.
  

Tips for finding the best FHA lender

In addition to knowing the right questions to ask potential lenders, here are some tips for how to find the best FHA lender for your needs.

Know your credit score

It’s crucial to know your credit score before you apply for an FHA loan. For one, your score might be better than you think — even good enough for you to qualify for a conventional mortgage.

Keep in mind that if your credit score is especially low, your lender options will likely be limited. While the hard cutoff for approval of an FHA loan is a credit score of 500, Fleming says some lenders won’t work with you if your credit score is below 580. Others set even higher minimums, so you may need a score of 620 or higher for loan consideration.

If your credit score is in the murky area between 500 and 579 where you’ll need to put at least 10 percent down, you might need to improve your credit before you apply if you don’t have that much cash on hand.

Understand how closing costs work

FHA-approved lenders are limited to charging no more than 2 to 6 percent of the loan amount in closing costs. The FHA also allows sellers, home builders and lenders to cover some of your closing costs, such as fees for an appraisal, credit report or title search — up to 6 percent of the expenses. If the lender is rolling the closing costs into your loan amount, which is another possibility, you’ll likely pay a higher interest rate and have a higher loan balance.

Within three days after applying for your FHA loan, you’ll receive a loan estimate. To find how much the lender is charging, look under the “Closing cost details” section at “Origination charges.” These fees differ by lender and might be negotiable.

If you think you’ll need help, keep in mind you could qualify for down payment assistance or help with closing costs. There are also state and local mortgage programs that you can pair with an FHA loan to help you cover some of the upfront costs of purchasing a home.

Know your APR

Finally, don’t forget to measure the impact of the APR, or annual percentage rate, for which you qualify. Remember, there’s a difference between the interest rate and APR. It’s easy to assume FHA loans would all have the same APR, but this couldn’t be further from the truth.

“The FHA doesn’t set interest rates or fees,” says Fleming. “Each lender can set their own, so there can be quite a lot of variance between lenders.”

You’ll find the interest rate the lender is charging on the front page of your loan estimate under “Loan terms.” The APR is on the third page under “Comparisons.”

Bankrate’s mortgage APR calculator can help you determine the long-term costs of your mortgage and how it might stack up to other offers.

Important considerations before getting an FHA loan

Buying a home with only 3.5 percent down and a competitive interest rate might seem like a dream come true, but it’s important to note FHA loans, despite their generous terms, have some downsides.

The most notable drawback of FHA loans is that they require the borrower to pay mortgage insurance premiums (MIP). There’s an upfront MIP of 1.75 percent of the loan amount, which is paid when you get the loan. Then there’s an annual MIP that varies from 0.45 percent to 1.05 percent, depending on the loan term, loan amount and the loan-to-value (LTV) ratio.

If you put down less than 10 percent, you won’t be able to cancel the annual MIP — you’ll pay it for the life of the loan. However, if you put down 10 percent or more on an FHA loan, you can have the mortgage insurance removed after 11 years.

Another way to remove FHA mortgage insurance is to refinance your FHA loan into a conventional mortgage when you have at least 20 percent equity in your home.

FHA loans also have a limit to how much you can borrow. For 2024, those limits are $498,257 for a single-family home. Higher-cost areas have a maximum limit of $1,149,825.