An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency inside the Department of Housing and Urban Development

The FHA does not lend money itself. Instead, a bank or mortgage company lends you the money, and the FHA insures that loan — meaning if you stop paying, the FHA covers the lender's loss. This insurance lets lenders approve borrowers with lower credit scores, smaller down payments, and less savings than conventional mortgages require. You pay for that insurance as part of your monthly payment and as an upfront fee.

FHA loans are used only to buy a primary residence — the house or condo where you will live most of the year. You cannot use an FHA loan to buy a second home, an investment property, or a vacation house. The property must meet FHA standards for safety and condition, which means the lender will order an inspection before closing.

Key Takeaways

  • FHA loans require a down payment as low as 3.5 percent of the purchase price, compared to 5 to 20 percent for most conventional mortgages.
  • Your credit score can be as low as 500 to 580 depending on the lender, whereas conventional loans typically require 620 or higher.
  • You pay mortgage insurance both upfront (1.75 percent of the loan amount) and monthly (0.55 to 0.80 percent of the loan balance per year), which stays on the loan for its full term if your down payment was less than 10 percent.
  • The property must pass an FHA inspection for safety and condition, and you cannot use the loan to buy investment properties or second homes.
  • Debt-to-income limits are typically 43 to 50 percent, meaning your total monthly debt payments (including the new mortgage) cannot exceed that percentage of your gross monthly income.

Down payment and credit score requirements

An FHA loan requires a minimum down payment of 3.5 percent of the purchase price. If you are buying a $200,000 house, your down payment would be $7,000. The remaining $193,000 is borrowed. Some lenders will go lower in specific cases, but 3.5 percent is the standard floor set by FHA rules.

Your credit score can range from 500 to 580 for a 3.5 percent down payment, depending on which lender you use. Some lenders require 620 or higher. If your score is between 580 and 619, most lenders will still work with you, though you may pay a higher interest rate. Scores below 500 are rarely approved. The FHA itself does not set a minimum score — individual lenders do — so calling three or four lenders to compare their requirements is worth your time.

Your down payment does not have to come from your own savings. The FHA allows gifts from family members, employers, nonprofits, and government programs. The gift must be documented in writing, and the person giving it cannot expect repayment. If you are using a gift, tell your lender early in the process, because they will ask for a letter from the gift-giver confirming the amount and that no repayment is expected.

Mortgage insurance costs and how long you pay them

Mortgage insurance protects the lender, not you. You pay for it in two ways: an upfront fee and a monthly premium. The upfront fee is 1.75 percent of the loan amount, added to your mortgage balance at closing. On a $193,000 loan, that is $3,377.50 rolled into what you owe.

The monthly premium ranges from 0.55 to 0.80 percent of your loan balance per year, depending on the loan amount and your down payment. On a $193,000 loan with a 3.5 percent down payment, you might pay $88 to $129 per month. This amount is included in your monthly mortgage payment alongside principal, interest, and property taxes.

If your down payment was less than 10 percent, the mortgage insurance stays on the loan for its entire term — 15, 20, or 30 years. If your down payment was 10 percent or more, the insurance can be removed after 11 years of on-time payments. This is a significant difference: a 30-year mortgage with 3.5 percent down means you pay insurance for all 30 years, not just the first 11.

Debt-to-income limits and income verification

Your total monthly debt payments — including the new mortgage payment, car loans, credit cards, student loans, and any other debts — cannot exceed a certain percentage of your gross monthly income. The FHA standard is 43 percent, but some lenders will go up to 50 percent if you have strong compensating factors like a large savings account, a stable job history, or a very low credit card balance.

Gross monthly income means your income before taxes. If you earn $60,000 per year, your gross monthly income is $5,000. At 43 percent, your total debt payments cannot exceed $2,150 per month. The lender will verify your income using recent tax returns (usually two years), W-2 forms, and recent pay stubs. If you are self-employed, the lender will ask for profit-and-loss statements and may average your income over two years.

If you receive income from Social Security, disability, unemployment, or a pension, that counts toward your total income. You will need to provide documentation showing the amount and that it will continue. For Social Security and disability, the lender will request a benefits statement from the Social Security Administration.

Property inspection and appraisal requirements

Before the lender approves the loan, an FHA-approved appraiser must inspect the property and confirm it meets FHA minimum standards. The property must have a functioning roof, safe electrical and plumbing systems, working heat, and no major structural damage. The appraiser also confirms the property value supports the loan amount.

If the inspection finds problems — a roof with missing shingles, outdated wiring, a cracked foundation — the seller must repair them before closing, or you can negotiate a credit toward repairs. You cannot close on an FHA loan if the property fails inspection. This is different from a conventional loan, where the buyer can sometimes close and repair problems later.

The appraisal fee is typically $400 to $600 and is paid by you at the time of appraisal. This fee does not go toward your down payment — it is a separate cost. If the appraisal comes back lower than the purchase price, you will need to either pay the difference in cash, renegotiate the price with the seller, or walk away from the deal.

Interest rates and how they compare to conventional loans

FHA interest rates are set by the market, not by the FHA. Your rate depends on current market conditions, your credit score, your down payment size, and the lender you choose. Because FHA loans carry insurance, lenders sometimes offer rates that are 0.25 to 0.5 percent lower than conventional loans to borrowers with lower credit scores, since the insurance reduces the lender's risk.

A borrower with a 580 credit score might get a better rate on an FHA loan than on a conventional loan, because the mortgage insurance makes the loan safer for the lender. A borrower with a 750 credit score might get a better rate on a conventional loan, because they do not need the insurance protection and can may have access to for a conventional loan with a smaller down payment.

Shop rates from at least three lenders before committing. The difference between a 6.5 percent rate and a 6.75 percent rate on a $193,000 loan costs you roughly $30 more per month over 30 years. Over the life of the loan, that is $10,800.

Frequently Asked Questions

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

Yes, as long as the condo or townhouse complex meets FHA requirements. The FHA requires that at least 50 percent of units be owner-occupied (not rentals), that the complex have adequate insurance, and that the homeowners association be in good financial standing. The lender will verify these details before approving the loan.

What happens if I pay off my FHA loan early?

You can pay off an FHA loan at any time without penalty. The mortgage insurance does not refund, but you stop paying it once the loan is paid in full. If you refinance into a conventional loan after building equity, you can remove the FHA insurance at that time.

Can I remove the mortgage insurance before 11 years?

No. If your down payment was less than 10 percent, the mortgage insurance is permanent for the life of the loan. If your down payment was 10 percent or more, you can request removal after 11 years of on-time payments. Refinancing into a conventional loan is the only way to remove insurance earlier.

Do I need a co-signer for an FHA loan?

No. The FHA does not require a co-signer. However, if your debt-to-income ratio is too high or your credit score is very low, a co-signer with stronger finances can help you get approved. The co-signer's income and debts are added to yours for qualification purposes.

What if the seller will not make repairs after the inspection fails?

You cannot close on an FHA loan if the property fails inspection and repairs are not made. You can walk away from the deal, renegotiate with the seller to lower the price so you can pay for repairs yourself after closing, or find a different property. The FHA will not insure a loan on a property that does not meet its standards.