What an FHA mortgage loan is

An FHA mortgage loan is a home loan 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 may provide the loan, meaning if you stop paying, the FHA covers the lender's loss. This may provide lets lenders offer mortgages to people who might not otherwise get one: 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 FHA loans have lower down payment requirements than conventional mortgages — often 3.5 percent instead of 10 or 20 percent — and more flexible rules about credit history and debt.

Key Takeaways

  • An FHA loan is a mortgage insured by the Federal Housing Administration, allowing lenders to offer loans to borrowers with lower credit scores or smaller down payments.
  • You pay mortgage insurance premiums as part of your monthly payment, which protects the lender if you default.
  • FHA loans require a minimum down payment of 3.5 percent and allow credit scores as low as 580, though some lenders set higher minimums.
  • The property must meet FHA standards for safety and condition, and you must live in it as your primary residence.
  • FHA loans have limits on how much you can borrow, which vary by county and change each year.

Down payment and credit score requirements

FHA loans require a minimum down payment of 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 amount is financed through the loan. You do not need to save 20 percent like conventional loans often require.

Credit score requirements are more flexible than conventional mortgages. The FHA itself does not set a minimum credit score — lenders do. Most lenders will work with scores as low as 580, though some require 620 or higher. If your score is below 580, finding a lender willing to work with you becomes harder, though not impossible. Your credit history matters too: lenders look at whether you have paid bills on time, how much debt you carry, and whether you have had recent late payments or collections.

Mortgage insurance premiums you will pay

FHA loans come with two types of mortgage insurance. The first is an upfront mortgage insurance premium (UFMIP), which is a one-time fee calculated as a percentage of the loan amount. As of 2024, this is typically 1.75 percent of what you borrow. If your loan is $180,000, the UFMIP would be $3,150. You can pay this at closing or roll it into your loan amount.

The second is an annual mortgage insurance premium (MIP), which you pay monthly as part of your mortgage payment. The amount depends on your loan size, down payment percentage, and loan term. For a loan with a 3.5 percent down payment, annual MIP typically ranges from 0.55 to 0.80 percent of the loan amount per year, paid in monthly installments. Unlike conventional mortgages, FHA mortgage insurance does not automatically drop off once you reach 20 percent equity — you pay it for the life of the loan if you put down less than 10 percent.

Property requirements and restrictions

The property you buy must meet FHA standards. An FHA appraiser will inspect the home to ensure it is safe, structurally sound, and sanitary. The roof cannot be near the end of its life, plumbing and electrical systems must work, and there cannot be significant mold, lead paint hazards, or pest damage. If the home fails inspection, the seller must make repairs or you can walk away — the FHA will not insure a loan on a property that does not meet these standards.

You must also live in the home as your primary residence. FHA loans are not for investment properties or vacation homes. The property can be a single-family house, a condo, a townhouse, or a two- to four-unit building if you live in one unit. Some condos are not FHA-approved, so your lender will check whether the specific building meets FHA requirements.

Loan limits that vary by location

The FHA sets maximum loan amounts that change by county and by year. In lower-cost areas, the limit might be around $420,000 for a single-family home. In high-cost areas like parts of California or New York, the limit can exceed $1 million. Your lender can tell you the limit for your county. If the home costs more than the limit, you would need to put down a larger down payment to cover the difference, or look at a conventional loan instead.

These limits exist because the FHA has a finite insurance fund backed by taxpayers. By capping loan amounts, the FHA manages its risk across the country. The limits reset each January, so if you are planning to buy, check with your lender about the current year's cap for your area.

How FHA loans compare to conventional mortgages

Conventional mortgages typically require a 10 to 20 percent down payment and a credit score of 620 or higher. FHA loans ask for 3.5 percent down and work with scores as low as 580. However, conventional loans do not require mortgage insurance if you put down 20 percent, whereas FHA loans charge insurance for the life of the loan at lower down payments. Conventional loans also have fewer property restrictions and no occupancy requirement.

The choice between FHA and conventional depends on your situation. If you have limited savings for a down payment and a lower credit score, FHA is often the only realistic path to homeownership. If you have saved more and have stronger credit, a conventional loan might cost less over time because you can avoid mortgage insurance sooner.

The FHA appraisal process

Once you make an offer and the lender approves your loan, an FHA appraiser inspects the property. This is different from a standard appraisal — the FHA appraiser checks not just the home's value but also its condition and safety. The appraiser looks at the roof, foundation, plumbing, electrical, heating, and cooling systems. They check for water damage, mold, pest infestation, and lead paint. If problems are found, the seller must fix them or credit you money at closing to cover repairs.

The appraisal typically takes one to two weeks. If the home does not meet FHA standards, you can ask the seller to make repairs, renegotiate the price, or withdraw your offer. The FHA will not insure a loan on a property that fails inspection, so this is not optional.

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 most of the year. You cannot use an FHA loan to buy a vacation home, rental property, or investment property. If you already own a home and want to buy another, you would need a conventional loan or a different loan type.

What happens to my mortgage insurance if I pay off the loan early?

If you pay off an FHA loan early, you stop paying mortgage insurance at that point. However, you cannot remove mortgage insurance by refinancing into a conventional loan and then paying that off early — the insurance stays with the FHA loan itself. Some borrowers refinance to conventional loans specifically to drop the FHA insurance once they have built enough equity.

Do I need a down payment gift from family, or can I save it myself?

You can use your own savings, or the FHA allows down payment gifts from family members. If you receive a gift, the lender will ask for a signed letter from the family member stating it is a gift, not a loan you have to repay. The gift can cover part or all of your down payment.

What credit score do I actually need for an FHA loan?

The FHA itself has no minimum, but most lenders require 580 or higher. Some lenders go as low as 500 with a larger down payment. Your best option is to contact lenders directly — credit score requirements vary by lender and by the rest of your financial profile, including debt and income.

Can I refinance an FHA loan into a conventional mortgage later?

Yes. Once you have built equity and your credit has improved, you can refinance to a conventional loan. This removes the FHA mortgage insurance requirement, which can lower your monthly payment. Most people refinance after two to five years, once they have paid down the principal and their credit score has risen.