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. Okay, you’re sold. But here’s the big question: How do you find these miraculous mortgages?

Start by scrolling down this page. The tips we offer can help find the best FHA mortgage lender for you and your homeownership dreams.

How to find the best FHA loan lender

You start by shopping around the usual suspects: banks, credit unions and mortgage companies.

Yes, it’s a little confusing, but you go to a private lender to get an FHA loan; the Federal Housing Administration insures them, but a private financial institution offers and underwrites them. You can search for a list of FHA-approved lenders on the Dept. of Housing and Urban Development’s website (HUD oversees the FHA). Banks and mortgage companies often display their FHA affiliation in ads, too.

While they have to follow certain federal guidelines, each FHA mortgage lender  has its own FHA loan rates and fees, which is why it’s so important to shop around. Plus, some lenders have more lenient qualification requirements than others.

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

It might be helpful to enlist a mortgage broker who specializes in FHA loans, says Casey Fleming, a Silicon Valley mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.” A broker should be knowledgeable about the criteria and strategies that’ll 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 middlemen 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

  • There are almost a dozen different FHA loan programs. Your lender should be able to tell you which options will be best for you and the pros and cons of each.
  • 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.
  • Select lenders nationwide offer FHA down payment assistance to select borrowers.
  • 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
  • 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.
  • If you’re on a tight timeline, you’ll want to find a lender who can close quickly or on your schedule.
  • Ask your lender what closing costs you’ll have to pay, and whether you’ll need to pay mortgage points to attain the rate you were quoted.

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 to be considered for a loan.

If your credit score is in the murky area between 500 and 579 where you’ll be required 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 lenders are limited to charging no more than 3 percent to 5 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 can be paired 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, you qualify for. Remember, there’s a difference between 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.

FHA loan drawbacks and limitations

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 throughout the loan term. If you put more than 10 percent down on an FHA loan, however, you can have the insurance canceled after 11 years, says Stacey Elshehaby, processing manager of Silver Fin Capital Group based in Great Neck, New York.

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.

Final word on finding the best FHA mortgage lender

When it comes to FHA mortgage enders, you’ll need to do a bit of legwork to find a good fit, but your efforts will be well worth it. Start by shopping around and asking lenders the right questions. It’s equally important to know where your credit score stands and familiarize yourself with how closing costs works so you’ll know what to expect when you apply for a loan. Also, understanding how APRs impact borrowing costs along with the drawbacks of FHA loans will go a long way in helping you decide which lender is best.

Additional reporting by Allison Martin