An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency that backs the loan if you stop paying
The FHA itself does not lend money — banks and mortgage companies do. What the FHA does is promise to cover the lender's loss if you default. This promise lets lenders offer mortgages to people who might not may have access to for a conventional loan: those with lower credit scores, smaller down payments, or less stable income history.
Because the FHA absorbs the risk, you pay mortgage insurance premiums on top of your regular monthly payment. These premiums protect the lender, not you. The trade-off is access to a loan you might not otherwise get.
FHA loans are used only to buy a primary residence — the home you live in most of the year. You cannot use an FHA loan to buy an investment property, a vacation home, or a second residence.
Key Takeaways
- An FHA loan requires mortgage insurance premiums added to your monthly payment because the government is backing the loan, not because you are borrowing more than the home is worth.
- You can put down as little as 3.5 percent of the purchase price, compared to 5 to 20 percent for conventional loans.
- Credit score requirements are lower for FHA loans, though most lenders still want a score of at least 580 to 620.
- The FHA has limits on how much you can borrow in your area, and these limits vary by county and change each year.
- You must occupy the home as your primary residence within 60 days of closing and live there for at least one year.
Down payment requirements and what you actually need to bring
FHA loans allow down payments as low as 3.5 percent of the purchase price. If you are buying a $200,000 home, that means putting down $7,000. A conventional loan typically requires 5 to 20 percent down, so the FHA option opens homeownership to people who have not saved a large amount.
The remaining 96.5 percent comes from the loan itself. You are not borrowing more than the home is worth — you are simply financing a larger share of it. The lender accepts this because the FHA insurance covers their risk.
Your down payment can come from your own savings, a gift from a family member, or a grant from a nonprofit or government program. Some lenders allow you to cover closing costs with a gift as well, though you must document where the money came from.
Mortgage insurance premiums: what they cost and how long you pay them
FHA loans carry two insurance costs. 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 at closing, but you pay interest on it for 30 years. On a $193,000 loan, the UFMIP would be about $3,378.
The annual mortgage insurance premium (MIP) is paid monthly as part of your regular payment. The rate depends on your down payment and loan term. With a 3.5 percent down payment on a 30-year loan, MIP typically runs 0.55 percent of the loan balance per year, or about $106 per month on a $200,000 loan. This amount decreases as you pay down the principal.
You can remove MIP only after you have paid down the loan to 80 percent of the original home value and have owned the home for at least 11 years. For most borrowers, this takes 11 to 12 years. Conventional loans allow you to remove private mortgage insurance (PMI) sooner, usually after reaching 20 percent equity, which is one reason some people refinance out of FHA loans once their credit improves.
Credit score and income requirements
The FHA does not set a minimum credit score — individual lenders do. Most lenders require a score of at least 580 to 620, though some will go lower. If your score is below 580, finding an FHA lender becomes harder, and you may face a higher interest rate.
Your income must be stable enough to support the monthly payment. Lenders use your debt-to-income ratio, which compares your total monthly debt payments (mortgage, car loans, credit cards, student loans) to your gross monthly income. Most FHA lenders want this ratio to stay below 43 to 50 percent, depending on the lender and your credit profile.
If you are self-employed or have been in your current job for less than two years, lenders will ask for more documentation — usually two years of tax returns and a letter from your employer explaining the nature of your work. Recent job changes, gaps in employment, or a history of late payments will slow the process and may require explanation.
Loan limits vary by county and change each year
The FHA sets a maximum loan amount for each county in the United States. These limits are based on local home prices and change every year. In rural areas, the limit might be $420,000; in expensive urban areas, it can exceed $1 million.
You can find your county's current FHA loan limit on the HUD website or by asking your lender. If you want to borrow more than the limit allows, you will need a conventional loan or a jumbo loan (a non-conforming loan for amounts above conventional limits).
The limit applies to the loan amount, not the home price. If you are putting down 3.5 percent on a $500,000 home in a county with a $450,000 FHA limit, you cannot use an FHA loan — you would need to put down enough to bring the loan amount below $450,000, or use a different loan type.
Property requirements and what homes may have access to
The home must meet FHA minimum standards for safety, soundness, and livability. An FHA appraiser will inspect the property and flag issues like missing handrails, exposed wiring, roof leaks, or structural damage. The seller must fix these problems before closing, or you must agree to fix them yourself after purchase.
The property must be a single-family home, a duplex, a triplex, a fourplex, or an approved condominium. Manufactured homes and mobile homes can may have access to if they meet specific FHA standards. You cannot use an FHA loan on a vacant lot or a commercial property.
If you are buying a condo, the building itself must be FHA-approved. Not all condos are — the FHA requires that at least 50 percent of units be owner-occupied and that the building meet certain financial and structural standards. Your real estate agent or lender can check whether a specific condo building is on the FHA's approved list.
How an FHA loan differs from a conventional loan
The main differences come down to down payment, credit requirements, and insurance costs. An FHA loan lets you buy with 3.5 percent down and a lower credit score, but you pay mortgage insurance for the life of the loan (or at least 11 years). A conventional loan requires a larger down payment and higher credit score, but you can remove PMI once you reach 20 percent equity, usually in 5 to 10 years.
FHA loans also have stricter property standards. A conventional lender might accept a home with deferred maintenance or cosmetic issues; an FHA appraiser will not. This can slow the closing process if the seller is unwilling to make repairs.
Interest rates on FHA and conventional loans are usually similar, though your personal credit score and the current market affect what rate you receive. Shop with multiple lenders to compare — a difference of 0.25 percent on a $200,000 loan adds up to thousands of dollars over 30 years.
Frequently Asked Questions
Can I use an FHA loan to buy a second home or investment property?
No. FHA loans are for primary residences only — the home you will live in as your main address. You must move into the home within 60 days of closing and occupy it for at least one year. If you want to buy a rental property or vacation home, you will need a conventional loan or an investment property loan.
What happens if I refinance an FHA loan into a conventional loan?
You can refinance out of an FHA loan once your credit improves or your home value rises. A conventional refinance removes the mortgage insurance requirement, which can lower your monthly payment. You will need to meet conventional loan standards (usually a credit score of 620 or higher and 20 percent equity) and pay closing costs on the new loan.
Do I have to pay the upfront mortgage insurance premium at closing?
No. The upfront premium (UFMIP) is rolled into your loan amount, so you do not pay it out of pocket at closing. You pay interest on it over the life of the loan. Some lenders allow you to pay it upfront if you want to reduce the loan amount, but most borrowers roll it in.
Can I remove mortgage insurance before 11 years?
Not with an FHA loan. You must wait at least 11 years and pay the loan down to 80 percent of the original home value. If you want to remove insurance sooner, refinancing into a conventional loan is your only option, and you will need to meet conventional lending standards at that time.
What credit score do I need for an FHA loan?
The FHA does not set a minimum, but most lenders require 580 to 620. Some lenders will work with scores as low as 500 to 580, though you may face a higher interest rate or larger down payment requirement. Ask multiple lenders what their minimum is — it varies.