Generally, it takes about two months to close on an FHA loan. According to August 2021 data, for example, it takes an average of 51 days (about seven weeks) to close on an FHA loan, compared to just two weeks if you were to pay in cash. Learn more about why you still might want to choose an FHA loan and how the different requirements affect the time it takes to close on a loan
How FHA Loans Work
FHA loans aren’t given out directly by the FHA, or Federal Housing Administration, itself. Rather, it insures your loan so that if you default, your lender will be sure to get their money back. Thus, lenders are more willing to approve you for a mortgage if you otherwise might not qualify—namely, if your credit isn’t the best, or if you don’t have a big down payment saved up. This is why the program is especially popular with first-time homebuyers. However, FHA loans do come at a cost. The FHA doesn’t provide insurance for free; instead, it charges you for it to ensure the risk of making a loan to you is low. It does this in the form of an extra cost tacked onto your mortgage called your mortgage insurance premium, or MIP.
FHA Loan Timeline
Closing on an FHA loan is similar to most other types of mortgages, but with a few special requirements.
FHA Home Inspection
The FHA requires that your home be inspected by a licensed inspector to make sure it conforms to FHA minimum property standards. Since it’s providing the insurance, it wants to make sure that the home it’s insuring is actually liveable. Inspectors typically check for things like structure quality, the condition of the interior and exterior of the property, and the marketability of the property, among others. Your lender will schedule the inspector, so you won’t have to worry about this step.
FHA Home Appraisal
Your lender will also schedule an appraisal for the home. The FHA won’t insure more than the home is actually worth (as opposed to what you offered for it, which can be a different number entirely). That’s an especially important factor to consider when there is a red-hot market in play.
Factors That Impact the Time It Takes To Close an FHA Loan
Home appraisals and inspections aren’t unusual in an underwriting process. All lenders will generally require an appraisal, and other government-backed loans like VA loans or USDA loans require inspections to make sure it meets the loan requirements as well. However, because your FHA loan can’t be approved unless it passes these two bars, that’s where things can sometimes get complicated.
If Your Home Doesn’t Appraise For Your Offer Amount
When you make an offer on a home, you’re telling the seller the amount that you’re willing to pay. However, what the lender is actually willing to lend to you might be a completely different number, especially if there’s an appraisal gap (i.e., when the home appraises for a different number than your offer). Two things can happen with an appraisal gap. The best-case scenario happens if the home appraises for more than your accepted offer. In that case, the lender generally has no problem lending you the requested amount, and you get instant equity in the home. But often, the home will appraise for less than your accepted offer. In that case, you’ll either need to pay the difference in cash from your own savings, negotiate a lower price with the seller, or walk away from the deal.
If Your Home Doesn’t Pass the Inspection
Another snafu can happen if the home doesn’t pass the FHA-required inspection. This can happen if there are underlying problems with the house, such as a broken septic system or faulty electrical wiring. In this case, your lender may require you to get these fixed before it’ll approve the loan. You’ll need to negotiate this with the seller. If no one agrees to make the necessary repairs, you may have to walk away from the deal.
The Bottom Line
FHA loans are one of the backbones of homeownership in America. The program started in 1934, and in 2020, over 1.3 million people took out a FHA loan. It’s the largest insurer of mortgages in the U.S. However, FHA loans do come with some disadvantages. Aside from the higher cost of the loan, it could take longer to close on your loan too. And if there are any issues that pop up during the appraisal and inspection, it could delay or even derail your purchase. But if you aren’t able to qualify for other types of loans, an FHA loan could be worth the hassle to get you started on the journey of homeownership.
