How the FHA Loan Process Works in California

This is the latest in a series of articles designed to educate California home buyers on the FHA loan program. In previous articles, we looked at the basic document requirements for an FHA loan, along with the minimum down payment (3.5%).

Today, we will zoom out and look at the broader FHA loan process in California. We’ll cover all of the major steps, from the initial loan application to the final closing.

FHA Loan Process in California: By the Numbers

In most regards, the FHA mortgage loan process is similar to the process borrowers go through when using a conventional or non-government-backed loan. But there are a few key differences along the path to closing.

Here are some of the basic steps that take place during the FHA loan process in California, from a home buyer’s perspective.

1. The borrower submits a loan application.

The loan application is one of the first steps in this process in California. Here, the borrower will fill out and submit a standard loan application form. This is actually the same form used for conventional mortgage loans. You can find examples online by doing a search for “Uniform Residential Loan Application.”

The FHA loan application asks for a variety of information about the borrower and their financial situation. It is one of the first documents a borrower will submit during the FHA loan process in California. It gets the ball rolling, so to speak.

2. The home buyer gets pre-approved for an FHA loan amount.

Pre-approval is typically the next step in the FHA loan process. In some cases, it happens in conjunction with the application mentioned above.

Mortgage pre-approval occurs when a bank or lender reviews a borrower’s financial situation and tells them how much they are able to borrow. The lender will then issue a pre-approval letter, which the home buyer can use when making an offer on a house.

Pre-approval is an important step in the FHA loan process in California, and for multiple reasons. For one thing, it allows you to tailor your housing search to a specific price range.

A pre-approval letter might also improve the chances of you getting your offer accepted. In fact, most sellers will request to see a pre-approval letter from a potential buyer who is using a mortgage loan.

3. The house hunting process begins.

Technically speaking, house hunting is not one of the steps in the FHA loan process. But it is one of the most important steps during the home buying process, so they essentially go hand-in-hand.

This is where you, the home buyer, begin shopping for a house that meets your needs. House hunting can involve many different search techniques, including property listing websites, neighborhood tours, and searches conducted through the Multiple Listing Service (MLS).

4. You make an offer on a house.

Once you’ve found a home that meets your needs and falls within budget, you can make an offer to purchase it.

The purchase agreement usually indicates the type of financing being used. So in this case, it would inform the seller that the buyer is using an FHA-insured home loan to finance their purchase.

How much you offer in relation to the list price will depend on local real estate market conditions. For instance, in a slower real estate market the buyer might offer less than the seller’s asking price. In a more competitive market where multiple offers are common, buyers might offer more than the seller is asking.

This is where it helps to have an experienced real estate agent on your side. A savvy agent will be able to evaluate the asking price and advise you on the best path forward, in light of local market conditions.

5. The home gets appraised to determine market value and condition.

Here’s where the FHA loan process in California differs slightly from conventional mortgage financing. In both cases, the mortgage lender will have the home appraised to determine its current value. But the FHA appraisal goes a step further.

In accordance with HUD guidelines, the appraiser must also ensure that the home being purchased meets the minimum property requirements. That’s a key distinction when it comes to the FHA loan process.

When a conventional mortgage loan is being used, the appraiser is primarily concerned with the market value of the property. With an FHA loan, the appraiser will determine the market value while also examining the overall condition.

6. The buyer has the home inspected, if desired.

As a home buyer, you have the option of hiring your own inspector to perform a more detailed inspection of the property. This is separate from the basic property inspection that’s “built into” the appraisal, as outlined above.

The Federal Housing Administration does not require home buyers in California to have an appraisal when using an FHA loan. It’s optional. But in many cases, it makes sense to have the property inspected before buying it. Just know that it’s your choice.

7. The underwriting process begins.

Underwriting is another important step in the FHA loan process for California home buyers. It involves a thorough review of all loan documents and related information. The goal here is to ensure that the borrower and the property being purchased meet all applicable guidelines and requirements.

During the FHA loan process, the mortgage underwriter might need to request additional information from the borrower. For instance, he or she might need a letter of explanation for a specific financial transaction, a recent change of employment, etc.

Once the FHA loan clears the underwriting process, it moves on to the closing. So let’s wrap things up with an explanation of this important (and final) step in the FHA mortgage process.

8. The buyer completes the closing process and becomes a homeowner!

From the borrower’s standpoint, closing represents the final step in the FHA loan process. A lot happens during the closing, but most of it can be summed up in a single sentence: The home buyer / borrower will sign a lot of documents and pay whatever closing costs are due.

The closing costs for FHA loans are comparable to those applied to other types of mortgage loans. These costs can vary based on a number of factors, including whether or not the borrower uses mortgage discount points.

Generally speaking, home buyers in California who use an FHA loan can expect to pay anywhere between 2% and 5% of the purchase price in closing costs. But that’s just a ballpark range based on averages. You’ll receive an estimate of your closing costs when you apply for an FHA loan, followed by a finalized list as the closing date approaches.

Disclaimer: This article provides a basic overview of the FHA loan process for California home buyers. Every lending scenario is different because every borrowers unique. As a result, portions of this article might not apply to your particular situation.