An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency that guarantees the loan to the lender if you stop paying
The FHA does not lend the money itself — a bank or mortgage company does. What the FHA does is promise to cover the lender's loss if you default. This may provide 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 backs the loan, you pay an insurance premium on top of your regular mortgage payment. This premium protects the lender, not you. The trade-off is that you can buy a home with a down payment as low as 3.5 percent, whereas a conventional loan typically requires 5 to 20 percent down.
Key Takeaways
- An FHA loan requires mortgage insurance premiums added to your monthly payment, which you cannot remove even after you build equity.
- The minimum down payment is 3.5 percent of the home's purchase price, and the FHA sets limits on how much you can borrow based on your county.
- Your debt-to-income ratio — the percentage of your monthly income that goes to all debt payments — must stay below 43 percent for most lenders.
- FHA loans have lower credit score requirements than conventional mortgages, but you still need a score of at least 580 to put down 3.5 percent.
- The process takes 30 to 45 days from application to closing, and you will need recent pay stubs, tax returns, and bank statements to prove your income and savings.
Down payment and loan limits by county
The FHA requires a minimum down payment of 3.5 percent of the purchase price. If you are buying a $200,000 home, you would put down $7,000 and borrow $193,000. The remaining amount — the difference between your down payment and the loan amount — is what you finance.
The FHA also sets a maximum loan amount for each county. This limit changes yearly and depends on the median home price in that area. In rural counties, the limit might be $472,000; in high-cost urban areas, it can exceed $1 million. You can find your county's limit on the HUD website by entering your zip code. If the home you want costs more than the limit, you will need a conventional loan or a larger down payment.
Mortgage insurance premiums and what they cover
FHA mortgage insurance comes in two parts: an upfront premium and an annual premium.
The upfront mortgage insurance premium (UFMIP) is 1.75 percent of the loan amount, charged at closing. On a $193,000 loan, this would be $3,377.50. Most borrowers roll this into the loan amount rather than paying it in cash, which means you borrow more money and pay interest on the insurance premium itself.
The annual mortgage insurance premium (MIP) is a percentage of your loan amount divided into 12 monthly payments. The rate depends on your down payment and the loan term. If you put down 3.5 percent on a 30-year loan, your MIP is roughly 0.55 percent per year — about $1,061 annually on a $193,000 loan, or roughly $88 per month. This amount is added to your regular mortgage payment every month for the life of the loan. Unlike conventional mortgages, you cannot remove FHA mortgage insurance once the loan closes, even if you pay off half the balance.
Credit score and debt-to-income requirements
The FHA does not set a minimum credit score, but most lenders require a score of at least 580 to approve a 3.5 percent down payment. If your score is between 500 and 579, some lenders will work with you, but you may need to put down 10 percent instead. Scores below 500 are rarely approved for FHA loans.
Your debt-to-income ratio (DTI) is the total of all your monthly debt payments divided by your gross monthly income. This includes car loans, credit cards, student loans, child support, and the new mortgage payment. Most lenders cap this at 43 percent. If you earn $5,000 per month, your total debt payments cannot exceed $2,150. Some lenders will go to 50 percent if you have strong compensating factors — a large savings account, a very high credit score, or a significant income increase.
Income and asset documentation you will need
Lenders verify income and savings to confirm you can make the payments. Bring recent documents to your mortgage application:
- Two months of recent pay stubs from your current job
- Two years of tax returns (W-2s or 1040s)
- Two months of bank statements showing savings and checking accounts
- A letter from your employer confirming your job title and start date
- If self-employed, profit-and-loss statements for the past two years
If you have changed jobs in the past two years, bring documentation from both employers. If you receive income from Social Security, disability, or child support, bring the award letter or bank statements showing regular deposits. The lender will verify employment directly with your employer, so make sure your employer knows you are applying for a mortgage.
Timeline from application to closing
The FHA loan process typically takes 30 to 45 days. Here is the general order:
Days 1–3: You submit your application and initial documents to the lender. The lender orders a credit report and begins verifying employment and income.
Days 4–10: The lender orders a home appraisal. The appraiser visits the property and sends a report to the lender. The FHA requires the home to meet certain safety and livability standards; if it does not, the seller must make repairs before closing.
Days 11–25: The lender reviews the appraisal and may request additional documents if income or assets are unclear. You may receive a "conditional approval," which means approval pending final verification of employment and a clear title search.
Days 26–45: The title company conducts a search and issues a title insurance policy. The lender does a final employment check 24 to 48 hours before closing. You sign closing documents and receive the keys.
FHA loans versus conventional mortgages
The table below shows how FHA and conventional loans differ on the features that matter most when you are deciding which to pursue.
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% | 5–20% |
| Minimum credit score | 580 (for 3.5% down) | 620–680 (varies by lender) |
| Mortgage insurance | Required; cannot be removed | Required if down payment is less than 20%; can be removed |
| Maximum debt-to-income ratio | 43% (up to 50% with compensating factors) | 43–50% (varies by lender) |
| Interest rate | Typically 0.5–1% higher than conventional | Lower, based on credit and market |
| Property type | Single-family, condo, townhouse, multi-unit (up to 4 units) | Any property type |
An FHA loan makes sense if you have a lower credit score, limited savings for a down payment, or recent financial setbacks. A conventional loan is cheaper over time if you can afford a larger down payment and have a credit score above 680, because you avoid the permanent mortgage insurance premium.
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 where you will live most of the year. You cannot use an FHA loan to buy a vacation home, rental property, or investment property. If you own another home, you must sell it or rent it out before closing on an FHA purchase.
What happens if the home appraisal comes in lower than the purchase price?
The lender will only lend up to the appraised value. If you agreed to pay $250,000 but the appraisal is $240,000, you have three options: renegotiate the price with the seller, pay the $10,000 difference in cash, or walk away. The seller may also agree to make repairs to bring the value up, which the appraiser will re-evaluate.
Can I refinance an FHA loan into a conventional mortgage later?
Yes. Once you have built equity and your credit score has improved, you can refinance into a conventional loan to remove the mortgage insurance premium. This usually makes sense after you have paid down the balance to 80 percent of the original purchase price or after your credit score rises significantly.
Do I need to live in the home for a certain amount of time after closing?
The FHA requires you to occupy the home as your primary residence within 60 days of closing and to live there for at least one year. After that, you can rent it out or move, but you cannot rent it out before the one-year mark.
What if I have unpaid tax debt or a recent bankruptcy?
Recent bankruptcy does not automatically disqualify you. FHA guidelines allow approval two years after a Chapter 7 discharge or one year after a Chapter 13 if you have made all payments on time since. Unpaid federal or state tax debt must be resolved or on a payment plan before closing. Contact the lender directly about your specific situation.