What an FHA loan is
An FHA loan is a mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The FHA does not lend the money itself — a bank or mortgage lender does. What the FHA does is promise to cover the lender's loss if you stop paying. That may provide lets lenders offer mortgages to people who might not meet the stricter requirements of a conventional loan.
The trade-off is that you pay mortgage insurance premiums — a fee added to your monthly payment and sometimes charged upfront. This insurance protects the lender, not you. It stays on your loan for the life of the mortgage if you put down less than 10 percent, or until you reach 20 percent equity if you put down 10 percent or more.
FHA loans are used to buy single-family homes, townhouses, and some multi-unit properties. They cannot be used to buy investment properties or vacation homes — only your primary residence.
Key Takeaways
- FHA loans require a down payment as low as 3.5 percent, compared to 5 to 20 percent for conventional mortgages.
- You must pay mortgage insurance premiums for the life of the loan if your down payment is under 10 percent.
- Credit score requirements are lower than conventional loans, but you still need a score of around 580 or higher to get the best terms.
- The lender, not the FHA, decides whether to approve your loan based on your income, debts, and credit history.
- FHA loans have limits on how much you can borrow, and those limits vary by county.
Down payment and credit requirements
FHA loans allow down payments as low as 3.5 percent of the home's purchase price. If you have a credit score of 580 or higher, you can put down 3.5 percent. If your score is between 500 and 579, most lenders require 10 percent down, though some will not work with scores below 580.
Your credit history matters more than a single score. Lenders look at whether you have paid bills on time, how much debt you carry, and how long you have had credit accounts open. A bankruptcy or foreclosure does not automatically disqualify you — the FHA allows loans to borrowers who had a bankruptcy if at least two years have passed since the discharge, or one year after a foreclosure. Your lender may have stricter rules.
You will also need to show that your monthly debt payments (including the new mortgage) do not exceed 43 to 50 percent of your gross monthly income, depending on your credit score and the lender's policy. Some lenders will go higher if you have compensating factors — a large savings account, a co-borrower with strong income, or a significant down payment.
Mortgage insurance premiums and what they cost
FHA mortgage insurance has two parts: an upfront premium and an annual premium. The upfront mortgage insurance premium (UFMIP) is typically 1.75 percent of the loan amount and is usually rolled into your mortgage — you do not pay it in cash at closing, but you borrow it and pay interest on it over the life of the loan.
The annual mortgage insurance premium (MIP) is charged monthly as part of your payment. The amount depends on your loan amount, down payment, and the length of your loan. For a loan with a 3.5 percent down payment, annual MIP is roughly 0.55 percent of the loan amount per year, though this varies. On a $300,000 loan, that could be around $1,650 per year, or about $138 per month — but ask your lender for an exact quote, because rates change.
If you put down 10 percent or more, you can remove the annual MIP once you reach 20 percent equity in the home. If you put down less than 10 percent, the MIP stays for the entire loan term, even after you build equity.
Loan limits by county
The FHA sets a maximum loan amount for each county in the United States. These limits are based on local home prices and change each year. In lower-cost areas, the limit might be $420,000; in high-cost areas like parts of California or New York, it can exceed $1 million.
You can find your county's FHA loan limit on the HUD website or by asking your lender. The limit applies to the total amount you can borrow, not the price of the home. If a home costs more than the limit, you would need to put down the difference in cash or look for a less expensive property.
How the approval process works
When you apply for an FHA loan, the lender reviews your income, debts, credit history, and employment. They order an appraisal to confirm the home is worth what you are paying. The FHA does not review your individual application — the lender makes the approval decision using FHA rules as the floor, not the ceiling. A lender can impose stricter requirements than the FHA requires.
The appraisal is important because the home must meet FHA property standards. The inspector checks for major safety and structural issues — a roof that is failing, foundation cracks, or hazardous materials. A home does not have to be perfect, but it has to be safe and habitable. If the appraisal comes back low (the home is worth less than the purchase price), you have options: renegotiate the price, put down more cash, or walk away.
Approval typically takes 30 to 45 days from application to closing, though it can be faster or slower depending on how quickly you provide documents and how busy the lender is.
FHA loans versus conventional mortgages
The main advantage of an FHA loan is the low down payment and more flexible credit requirements. If you have limited savings or a credit score below 620, an FHA loan may be your only option. The main disadvantage is the mortgage insurance premium, which adds to your monthly payment and cannot be removed if you put down less than 10 percent.
A conventional loan typically requires 5 to 20 percent down and a credit score of 620 or higher. Conventional mortgage insurance can be removed once you reach 20 percent equity, which is a significant advantage over time. However, conventional loans have stricter debt-to-income limits and less flexibility on credit history.
If you can afford a 10 to 20 percent down payment and have a credit score above 640, a conventional loan might cost less over the life of the mortgage because you can eventually remove the insurance. If you have limited savings or a lower credit score, an FHA loan gets you into a home sooner, even though you will pay insurance for longer.
What disqualifies you from an FHA loan
You cannot use an FHA loan to buy an investment property, a vacation home, or a property you do not intend to occupy as your primary residence. You also cannot use it to refinance a loan you already have unless you are doing a cash-out refinance (borrowing more than you owe) or an FHA Streamline refinance, which has its own rules.
Recent fraud or misrepresentation on a mortgage application can disqualify you. If you were convicted of mortgage fraud or loan origination fraud, you are ineligible. A felony conviction related to property or fraud in the past seven years may also disqualify you, though the FHA can grant exceptions in some cases.
Owing money to the FHA from a previous loan (such as an unpaid mortgage insurance claim) will block you from getting a new FHA loan until that debt is resolved.
Frequently Asked Questions
Can I use an FHA loan to buy a condo?
Yes, but the condo building must be FHA-approved. The FHA requires that at least 50 percent of units in the building be owner-occupied (not rentals), that the building have adequate reserves, and that the homeowners association have no major lawsuits pending. Your lender will check this before approving the loan. Not all condos meet these standards.
What happens if I stop paying my FHA mortgage?
The lender can foreclose, just as with any mortgage. The FHA insurance protects the lender, not you — it does not prevent foreclosure. If you fall behind, contact your lender immediately to discuss forbearance, loan modification, or other options. The FHA requires lenders to offer loss mitigation before foreclosing.
Can I refinance an FHA loan into a conventional loan?
Yes. Once you have built equity and your credit score has improved, you may be able to refinance into a conventional loan and remove the mortgage insurance. This usually makes sense if you have at least 20 percent equity and your credit score is 640 or higher. Your lender can tell you whether refinancing would save you money.
Do I need a real estate agent to get an FHA loan?
No. You can work directly with a lender and find a home on your own. A real estate agent can help you search and negotiate, but they are not required. If you use an agent, they typically work for the seller and are paid from the sale proceeds, so there is no cost to you.
What if the home fails the FHA appraisal?
The seller can make repairs to bring the home into compliance, you can negotiate a lower price to account for the repairs, or you can walk away. The lender will not fund the loan until the home passes inspection. You are not obligated to buy a home that does not meet FHA standards.