1. Creditworthiness assessment:
This includes reviewing the borrower's credit report, credit score, and payment history to evaluate their ability to repay the loan.
2. Employment verification and income documentation:
Lenders must verify the borrower's employment history and income stability. This involves reviewing pay stubs, W-2 forms, and tax returns.
3. Property appraisal and valuation:
An appraisal is conducted to determine the fair market value of the property being financed. The appraiser evaluates its condition and ensures it meets FHA standards.
4. Debt-to-income ratio calculation:
Lenders calculate the borrower's debt-to-income ratio to assess their ability to manage the mortgage payment along with other existing debts.
5. Verification of borrower assets:
Lenders verify the borrower's assets, such as bank statements, investment accounts, and retirement savings, to ensure they have sufficient funds for down payment and reserves.
6. Title examination and insurance:
A title examination is performed to identify any liens or encumbrances on the property. Lenders also require title insurance to protect against potential ownership disputes.
7. Compliance with FHA property eligibility standards:
The property must meet specific FHA standards regarding safety, habitability, and functionality. This includes requirements for heating, electrical, and plumbing systems.
8. Documentation of borrower's legal residency or citizenship status:
Borrowers must provide evidence of their legal residency or citizenship status to comply with FHA regulations.
9. Verification of borrower's Social Security Number:
Lenders must verify the borrower's Social Security Number to ensure accuracy and prevent identity fraud.
10. Compliance with FHA loan limits and maximum mortgage amounts:
The loan amount must not exceed the FHA loan limits for the respective area, and the mortgage amount should be within the borrower's qualification limits.