What an FHA loan actually does

An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency. The FHA does not lend you money directly. Instead, a bank or mortgage company lends you the money, and the FHA promises to cover the lender's loss if you stop paying. This promise lets lenders offer mortgages to borrowers who have lower credit scores, smaller down payments, or less savings than conventional loans require.

The trade-off is that you pay an insurance premium — money that protects the lender, not you. This premium comes out of your monthly payment and your upfront costs. The loan itself works like any other mortgage: you borrow a sum, pay it back over 15 or 30 years, and own the home once it is paid off.

Key Takeaways

  • An FHA loan requires a down payment as low as 3.5 percent, compared to 5 to 20 percent for most conventional mortgages.
  • You pay mortgage insurance premiums both upfront (rolled into the loan) and monthly, which adds to your total cost over time.
  • The home must pass an FHA inspection and appraisal, and the lender will verify your income, debts, and credit history before approval.
  • The entire process from application to closing usually takes 30 to 45 days, though it can be longer if documents are missing or the appraisal is delayed.
  • You can use an FHA loan to buy a single-family home, a condo, or a townhouse, but not an investment property or a vacation home.

Down payment and loan limits

FHA loans allow a down payment as low as 3.5 percent of the home's purchase price. If you are buying a $200,000 home, your down payment would be $7,000. The remaining $193,000 is borrowed. This low down payment is the main reason people choose FHA loans — conventional loans typically require 5 to 20 percent down.

There is a cap on how much you can borrow. The limit varies by county and changes each year. In 2024, the limit ranges from about $440,000 in lower-cost areas to over $1 million in high-cost areas like parts of California and New York. Your lender can tell you the limit for your specific county. You cannot borrow more than the home's appraised value, even if the seller is asking a higher price.

Mortgage insurance: what you pay and when

Mortgage insurance protects the lender if you default. You pay for this insurance in two ways. First, you pay an upfront mortgage insurance premium (UFMIP), which is typically 1.75 percent of the loan amount. On a $193,000 loan, that is about $3,378. This amount is added to your loan, so you borrow it rather than paying it out of pocket.

Second, you pay annual mortgage insurance premiums (MIP) each month as part of your mortgage payment. The monthly amount depends on your loan size, the length of your loan, and how much you put down. If you put down less than 10 percent, you pay MIP for the entire 30-year loan. If you put down 10 percent or more, MIP drops off after 11 years. Your lender will show you the exact monthly MIP amount before you sign.

Credit score and debt requirements

FHA loans do not have a strict minimum credit score set by the government. However, most lenders require a score of at least 580 to approve a loan with a 3.5 percent down payment. Some lenders will go lower, but rates and terms may be worse. If your score is between 500 and 579, you may still find a lender, but you will likely need a 10 percent down payment instead of 3.5 percent.

The lender will also look at your debt-to-income ratio, which is the percentage of your gross monthly income that goes to debt payments. FHA guidelines allow up to 50 percent, though most lenders prefer 43 percent or lower. If you earn $4,000 a month and have $1,500 in existing debt payments (car loan, credit cards, student loans), your ratio is 37.5 percent. The lender will add your new mortgage payment to this calculation to see if you stay within limits.

The home inspection and appraisal

Before the lender approves your loan, the home must pass an FHA inspection and appraisal. These are two separate things. The appraisal is done by a licensed appraiser who estimates the home's market value. The lender uses this value to make sure you are not borrowing more than the home is worth. If the appraisal comes in lower than the purchase price, you have three choices: renegotiate the price with the seller, pay the difference out of pocket, or walk away.

The FHA inspection checks that the home meets minimum safety and livability standards. The roof cannot be too old, the plumbing and electrical systems must work, and there cannot be significant mold, lead paint hazards, or structural damage. If the inspection finds problems, the seller must fix them or credit you money at closing. Some sellers refuse, which can kill the deal. This is why it is important to get a separate home inspection (paid by you) before you make an offer — it tells you what problems exist before you are under contract.

Income verification and documentation

The lender will ask for proof of your income. If you are employed, you will need recent pay stubs (usually the last two months) and tax returns (usually the last two years). If you are self-employed, you will need two years of tax returns and possibly a profit-and-loss statement. If you receive Social Security, disability, or pension income, bring a benefit statement from the agency paying you.

You will also need to show your assets — bank statements, retirement accounts, and investment accounts. The lender wants to know you have enough cash reserves to cover a few months of mortgage payments if you lose your job. The exact amount required varies by lender, but it is often one to three months of your new mortgage payment. You will also need to provide a list of all debts: credit cards, car loans, student loans, and any other monthly obligations. The lender will verify these by pulling your credit report.

Timeline from application to closing

The process typically takes 30 to 45 days from the time you submit your application to the day you close and receive the keys. Here is the general order: you submit your application and initial documents (usually within one week); the lender orders the appraisal (one to two weeks); you and the seller sign a purchase agreement; the lender reviews all your documents and orders the home inspection; the appraiser and inspector complete their work; the lender issues a conditional approval, asking for any missing documents; you provide those documents; the lender gives final approval; and you close.

Delays happen often. Missing documents, a low appraisal, a slow appraiser, or problems found in the inspection can add weeks. If you are selling another home to fund your down payment, that sale must close first. Tell your lender upfront about any complications so they can plan the timeline with you.

Frequently Asked Questions

Can I use an FHA loan to buy a second home or investment property?

No. FHA loans are only for primary residences — homes where you will live as your main address. You cannot use an FHA loan to buy a vacation home, a rental property, or a second home you plan to occupy part-time. If you own another home, you must sell it or rent it out before the FHA will back a new loan.

What happens if the home appraisal is lower than the purchase price?

You have three options: ask the seller to lower the price to match the appraisal, pay the difference yourself at closing, or cancel the purchase. If you cancel, you lose your earnest money deposit unless the contract allows you to back out due to a low appraisal. Most purchase agreements do allow this, so check yours before you sign.

Can I pay off the mortgage insurance early?

You cannot remove mortgage insurance before the scheduled time. If you put down less than 10 percent, you pay MIP for the full loan term. If you put down 10 percent or more, MIP stops after 11 years. Refinancing into a conventional loan is the only way to drop insurance early, but you must have enough equity and a good enough credit score to may have access to.

What if I have had a bankruptcy or foreclosure?

FHA loans are still possible, but there are waiting periods. After a bankruptcy discharge, you must wait two years before applying. After a foreclosure, the waiting period is three years. Some lenders may require longer. You will also need to explain what happened and show that your finances have stabilized since then.

Do I need a real estate agent to get an FHA loan?

No. You can find a home and negotiate directly with the seller. However, most buyers work with an agent because they know the local market and handle paperwork. Agents are paid by the seller, so using one does not cost you extra. If you do not have an agent, the seller's agent can still help you, though their loyalty is to the seller.