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. This promise lets lenders offer mortgages to people who might not meet the stricter rules of conventional loans.
The trade-off is that you pay mortgage insurance premiums on top of your regular loan payment. These premiums protect the lender, not you. You pay them for as long as you have the loan, or until you build enough equity to refinance into a conventional mortgage.
FHA loans are used to buy single-family homes, townhouses, and some multi-unit properties. You cannot use an FHA loan to buy an investment property or a vacation home — only a place where you will live as your primary residence.
Key Takeaways
- An FHA loan requires a down payment as low as 3.5 percent, compared to 10 to 20 percent for many conventional mortgages.
- Your credit score can be lower than conventional lenders require, though most FHA lenders want a score of at least 580.
- You will pay mortgage insurance premiums for the life of the loan, adding roughly 0.5 to 1 percent to your annual payment.
- The property must meet FHA safety and livability standards, which means the home inspection is stricter than a conventional purchase.
- Your debt-to-income ratio — the percentage of your monthly income that goes to all debts — cannot exceed 50 percent for most lenders.
Down payment and credit requirements
FHA loans allow a down payment as low as 3.5 percent of the purchase price. If you are buying a $200,000 home, you would put down $7,000. Conventional loans typically require 10 to 20 percent down, so this is a significant difference for first-time buyers or people with limited savings.
Credit score requirements vary by lender. The FHA itself does not set a minimum score, but most lenders will not approve you with a score below 580. Some lenders go as low as 500 with a larger down payment. If your score is between 580 and 620, you may face higher interest rates or stricter debt rules.
The FHA also looks at your credit history, not just your current score. Recent late payments, collections, or a bankruptcy within the last two years can disqualify you or require a manual review by an underwriter. A foreclosure within the last three years usually disqualifies you, though some lenders make exceptions after seven years.
Mortgage insurance premiums and costs
When you take out an FHA loan, you pay two types of mortgage insurance. The first is an upfront mortgage insurance premium (UFMIP), which is typically 1.75 percent of the loan amount. This is usually rolled into your loan, so you do not pay it out of pocket at closing, but you do pay interest on it for the life of the loan.
The second is an annual mortgage insurance premium (MIP), which you pay each month as part of your mortgage payment. The rate depends on your loan amount, down payment, and loan term. For most borrowers, MIP ranges from 0.5 to 1 percent of the loan amount per year. On a $180,000 loan, that could be $75 to $150 per month.
Unlike conventional mortgages, you cannot drop FHA mortgage insurance once you reach 20 percent equity. If you put down less than 10 percent, you pay MIP for the life of the loan. If you put down 10 percent or more, you can stop paying MIP after 11 years. The only way to eliminate it sooner is to refinance into a conventional loan.
Property standards and the home inspection
The FHA requires that any home you buy meets minimum safety, livability, and soundness standards. This is not optional — the property must pass an FHA appraisal before the loan closes. The appraiser checks for things like working plumbing and electrical systems, a safe roof, no major structural damage, and no health hazards like lead paint or mold.
These standards are stricter than a standard home inspection. A house that would pass a conventional appraisal might fail an FHA appraisal if the roof has less than two years of life left, the foundation has significant cracks, or the heating system is unreliable. If the home fails, the seller must make repairs or you can walk away from the deal.
This protection works in your favor — you are less likely to buy a home with hidden, expensive problems. But it also means you cannot buy a fixer-upper with an FHA loan unless you use a special FHA 203(k) loan designed for renovations.
Debt-to-income limits and income verification
Lenders use your debt-to-income ratio (DTI) to decide how much you can borrow. This is the percentage of your gross monthly income that goes toward all monthly debt payments — mortgage, car loans, credit cards, student loans, and child support. The FHA allows a DTI up to 50 percent, though most lenders cap it at 43 to 45 percent.
If you earn $4,000 per month and your new mortgage payment would be $1,200, plus you have $400 in other debts, your DTI is 40 percent ($1,600 divided by $4,000). You would be within range for most lenders. If you earn $3,000 and have the same debts, your DTI is 53 percent, and you would be over the limit.
The lender will ask for recent pay stubs, tax returns, and bank statements to verify your income. If you are self-employed, you may need two years of tax returns. If you receive income from Social Security, disability, or alimony, you can count that too, but you must provide documentation.
Loan limits and geographic variation
The FHA sets a maximum loan amount that varies by county. In lower-cost areas, the limit might be $420,000. In high-cost areas like San Francisco or New York City, it can exceed $1 million. You can find your county's limit on the HUD website by entering your zip code.
The loan limit also depends on whether you are buying a one-unit, two-unit, three-unit, or four-unit property. A duplex has a higher limit than a single-family home in the same county. If the home you want to buy costs more than your county's limit, you cannot use an FHA loan.
When an FHA loan makes sense
An FHA loan is most useful if you have a down payment of less than 10 percent, a credit score between 580 and 680, or recent credit problems that would disqualify you from a conventional loan. The lower down payment requirement means you can buy sooner instead of saving for years.
FHA loans are also common for first-time buyers because lenders are more willing to work with people who have limited credit history. If you have never borrowed money before, an FHA lender is more likely to approve you than a conventional lender would be.
However, if you have a credit score above 700, a down payment of 15 percent or more, and stable income, a conventional loan might cost less over time because you avoid the lifetime mortgage insurance premium.
Frequently Asked Questions
Can I use an FHA loan to buy a second home or investment property?
No. An FHA loan is only for a primary residence — the home where you will live most of the time. You cannot use it to buy a vacation home, rental property, or any home you do not intend to occupy yourself.
What happens if I stop paying my FHA mortgage?
The lender can foreclose on the home, just as with any mortgage. The FHA insurance protects the lender, not you. If you fall behind, contact your lender immediately to discuss options like forbearance or loan modification before foreclosure begins.
Can I refinance an FHA loan into a conventional mortgage?
Yes. Once you have built enough equity — usually 20 percent — and your credit score has improved, you can refinance into a conventional loan to eliminate the mortgage insurance premium. This typically makes sense if rates are favorable and you plan to stay in the home long enough to recoup closing costs.
Do I need a real estate agent to get an FHA loan?
No. A real estate agent can help you find a home, but you work directly with a mortgage lender to get the loan. Some lenders have preferred agent lists, but you are not required to use them.
What is the difference between an FHA loan and a VA loan?
VA loans are for military members, veterans, and surviving spouses and require no down payment. FHA loans are open to anyone and require a minimum 3.5 percent down payment. Both have mortgage insurance, but VA loans do not require an upfront premium like FHA loans do.