An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency that backs the loan if you stop paying

An FHA loan is a mortgage where the Federal Housing Administration promises to cover the lender's loss if you default. This insurance lets lenders approve borrowers they might otherwise turn down — people with lower credit scores, smaller down payments, or less savings. You pay a fee for this insurance, added to your monthly payment and your upfront costs. The lender still expects you to repay the full loan; the FHA insurance simply protects them.

The FHA does not lend the money itself. A bank, mortgage company, or credit union lends it. The FHA just insures the bet. This distinction matters because you work with a private lender for the actual loan, but the FHA's rules shape what that lender can and cannot do.

Key Takeaways

  • FHA loans require a down payment as low as 3.5 percent, compared to 5 to 20 percent on conventional mortgages, making them useful for first-time buyers with limited savings.
  • You pay mortgage insurance premiums both upfront (rolled into the loan) and monthly, which increases your total cost but allows the lower down payment.
  • Credit score requirements are lower than conventional loans — many lenders will work with scores in the 580 to 620 range, though higher scores get better rates.
  • The property must meet FHA standards for safety and condition, which means some older or damaged homes will not may have access to without repairs.
  • Debt-to-income limits cap how much you can borrow relative to your monthly income, typically around 43 to 50 percent depending on your credit and savings.

Down payment and upfront costs

FHA loans let you put down as little as 3.5 percent of the home's purchase price. On a $200,000 home, that is $7,000. A conventional loan typically requires 5 to 20 percent down. This lower barrier is why FHA loans appeal to first-time buyers and people who have not accumulated large savings.

You also pay an upfront mortgage insurance premium (UFMIP), usually 1.75 percent of the loan amount. This fee is almost always rolled into the loan itself, so you do not pay it out of pocket at closing — but you do pay interest on it for the life of the loan. On a $193,000 loan (the $200,000 purchase minus your $7,000 down payment), the UFMIP would be roughly $3,378, added to what you owe.

Beyond insurance, you pay standard closing costs: appraisal, title search, attorney fees, and lender fees. These run 2 to 5 percent of the loan amount and are separate from the down payment and insurance premium.

Monthly mortgage insurance and how long you pay it

Every month, you pay a mortgage insurance premium (MIP) on top of your principal, interest, taxes, and insurance. The MIP amount depends on your down payment and the loan term. A 3.5 percent down payment on a 30-year loan typically costs 0.55 percent of the loan balance annually, split into 12 monthly payments. On a $193,000 loan, that is roughly $89 per month.

How long you pay MIP depends on your down payment. If you put down 10 percent or more, you pay MIP for 11 years. If you put down less than 10 percent — which most FHA borrowers do — you pay MIP for the entire 30-year loan. This is a real cost difference: paying MIP for 30 years instead of 11 adds tens of thousands of dollars to what you owe.

You cannot simply stop paying MIP by refinancing into a conventional loan later, though refinancing is an option if your credit improves and you have built equity. The decision to take an FHA loan with a 3.5 percent down payment locks you into decades of insurance payments unless you refinance.

Credit score and debt requirements

Most FHA lenders will work with credit scores as low as 580, though some require 620 or higher. A conventional loan typically wants 620 to 680 as a floor. This flexibility is one reason FHA loans exist — they serve people whose credit history is thin or damaged but who are ready to buy.

Your debt-to-income ratio (DTI) — the percentage of your gross monthly income that goes to debt payments — cannot exceed 43 percent for most FHA loans. Some lenders will go to 50 percent if you have strong compensating factors like savings, a stable job, or a higher credit score. On a $4,000 monthly income, a 43 percent DTI means your total monthly debt payments (mortgage, car loans, credit cards, student loans) cannot exceed $1,720.

The lender will pull your credit report, verify your income with recent pay stubs and tax returns, and check your bank statements. If you have recent late payments, collections, or a bankruptcy, you may face a waiting period — typically two years after a bankruptcy discharge, or one year after a foreclosure.

Property requirements and the FHA appraisal

The home must pass an FHA appraisal, which is stricter than a standard appraisal. The appraiser checks not just value but condition. The roof must have adequate life remaining, the foundation must be sound, plumbing and electrical systems must work, and there cannot be evidence of mold, lead paint hazards, or pest damage. Cosmetic issues — old carpet, dated paint — do not matter. Structural or safety problems do.

If the appraisal uncovers problems, the seller can repair them before closing, or you can negotiate a price reduction. If the seller will not fix or reduce the price, the deal falls through. This is why FHA loans work better on well-maintained homes. A 50-year-old house with deferred maintenance may fail the appraisal or require expensive repairs.

The appraisal also confirms the home's value supports the loan amount. If the home appraises lower than the purchase price, you either pay the difference in cash or renegotiate the price with the seller.

Loan limits and geographic variation

FHA loans have maximum amounts that vary by county. In lower-cost areas, the limit might be $420,000. In high-cost urban areas, it can reach $1,089,300 or more. These limits change annually. Your lender can tell you the limit for your county, or you can check the FHA website.

If you want to borrow more than the FHA limit allows, you will need a conventional loan or a jumbo loan (a non-conforming loan for amounts above conventional limits). This is why FHA loans are most useful for first-time buyers and people in moderate-priced markets.

When an FHA loan makes sense versus other options

An FHA loan is strongest when you have a down payment of 3 to 10 percent, a credit score between 580 and 680, and you are buying a home in decent condition. The low down payment requirement and flexible credit standards open doors that conventional loans close.

A conventional loan makes more sense if you have 10 to 20 percent down and a credit score above 680. You will avoid mortgage insurance entirely (or pay it for a shorter time), and your total interest cost will be lower. If you have 20 percent down, conventional loans are almost always cheaper.

VA loans (for military members and veterans) and USDA loans (for rural properties) are alternatives worth exploring if you meet the criteria. Both have their own insurance or may provide structures and may offer better terms than FHA for specific borrowers.

Frequently Asked Questions

Can I use an FHA loan to buy a condo or townhouse?

Yes, but the condo complex or townhouse development must be FHA-approved. The FHA checks whether the project is financially stable, whether the homeowners association is well-run, and whether too many units are investor-owned. Some older or poorly managed complexes are not approved. Your lender will verify approval before you make an offer.

What happens if I miss a payment on an FHA loan?

Missing one payment triggers late fees and damage to your credit. After 120 days of missed payments, the lender can begin foreclosure. The FHA insurance protects the lender, not you — it does not prevent foreclosure. If you fall behind, contact your lender immediately to discuss forbearance or loan modification options.

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

Yes, if your credit improves and you have built equity. Refinancing into a conventional loan lets you drop the mortgage insurance, which saves money over time. You will pay closing costs again, so refinancing only makes sense if you plan to stay in the home long enough to recoup those costs through insurance savings.

Do I need a real estate agent to get an FHA loan?

No. An agent is helpful for finding homes and negotiating, but not required to get the loan. You can work directly with a lender and find properties on your own. However, an agent familiar with FHA loans can help you avoid properties that will not pass the appraisal.

What is the difference between an FHA loan and a conventional loan?

FHA loans require lower down payments (3.5 percent versus 5 to 20 percent), accept lower credit scores, and have more flexible debt rules. Conventional loans are cheaper if you have a larger down payment and good credit, because you avoid or minimize mortgage insurance. FHA loans open homeownership to people conventional lenders would reject.