What an FHA loan is

An FHA loan is a mortgage backed by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The FHA does not lend money itself — a bank or mortgage company does. What the FHA does is promise to cover the lender's loss if you stop paying. That may provide lets lenders offer mortgages to people who might not meet the stricter rules of a conventional loan.

The trade-off is that you pay an extra insurance premium, called mortgage insurance, on top of your regular monthly payment. This premium protects the lender, not you. FHA loans are most common for first-time buyers, people with lower credit scores, or those putting down less than 20 percent.

Key Takeaways

  • An FHA loan is a mortgage insured by the federal government, which allows lenders to accept borrowers with lower credit scores or smaller down payments than conventional loans require.
  • You must pay mortgage insurance as part of your monthly payment, and this cost does not go away even after you build equity in the home.
  • The minimum down payment is 3.5 percent of the purchase price, and you must have a credit score of at least 580 to may have access to, though some lenders require 620 or higher.
  • Your debt-to-income ratio — the percentage of your gross monthly income that goes to all debts — cannot exceed 50 percent for most borrowers.
  • You must occupy the home as your primary residence; FHA loans do not cover investment properties or second homes.

Credit score and debt requirements

The FHA does not set a single credit score floor — it is up to each lender. However, most lenders will not approve you with a score below 580. Some require 620 or higher. Your credit score reflects your history of paying bills on time, and a lower score signals higher risk to the lender.

Beyond credit score, the FHA looks at your debt-to-income ratio, or DTI. This is the total of all your monthly debt payments — car loans, credit cards, student loans, child support, and the new mortgage payment — divided by your gross monthly income (before taxes). The FHA allows a DTI up to 50 percent for most borrowers, though some lenders cap it at 43 percent. If your DTI is too high, you will need to pay down existing debt or increase your income before you can move forward.

Down payment and closing costs

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. This is much lower than the 20 percent down payment conventional loans often require, which is why FHA loans appeal to first-time buyers who have not saved a large amount.

You will also pay closing costs — fees for the appraisal, title search, underwriting, and other services. These typically range from 2 to 5 percent of the loan amount, though the exact figure depends on your lender and location. You may be able to negotiate with the seller to cover some of these costs, or roll them into the loan itself, but that increases the total amount you borrow.

Mortgage insurance premiums and how long you pay them

FHA loans require two types of mortgage insurance. The first is an upfront mortgage insurance premium (UFMIP), which is typically 1.75 percent of the loan amount. You can pay this at closing or roll it into your loan. The second is an annual mortgage insurance premium (MIP), which you pay monthly as part of your regular payment.

The annual MIP amount depends on your loan size, down payment, and loan term. If you put down less than 10 percent, you will pay MIP for the life of the loan — even after you own 50 percent of the home. If you put down 10 percent or more, you can stop paying MIP after 11 years. This is a significant cost difference, so the size of your down payment matters.

Employment and income verification

Lenders will ask for recent pay stubs, W-2 forms from the past two years, and tax returns to verify your income. If you are self-employed, the process takes longer — you will need to provide business tax returns and possibly a profit-and-loss statement. If you recently changed jobs, some lenders want a letter from your new employer confirming your position and salary.

The FHA does not require you to have been at your current job for a set length of time, but lenders often do. Many want to see at least two years of employment history in the same field, even if you switched employers. If you have gaps in employment, be ready to explain them in writing.

Property and occupancy rules

The home you buy must be your primary residence — the place where you live most of the year. FHA loans do not cover investment properties, vacation homes, or rental properties. The property itself must meet FHA standards, which means it has to pass an appraisal and inspection. The home cannot have major structural problems, hazardous materials, or code violations.

The property must also be a single-family home, a townhouse, a condo in an FHA-approved complex, or a 2- to 4-unit building where you occupy one unit. Manufactured homes and mobile homes may be financed with FHA loans, but they must meet specific age and condition requirements that vary by state.

Frequently Asked Questions

Can I get an FHA loan if I have had a foreclosure or bankruptcy?

Yes, but there are waiting periods. After a foreclosure, most lenders require three years to pass before you can get an FHA loan. After a Chapter 7 bankruptcy, the wait is typically two years from the discharge date. A Chapter 13 bankruptcy requires you to be current on your repayment plan, and some lenders want you to have completed it.

What is the maximum loan amount I can borrow?

FHA loan limits vary by county and change each year. In 2024, the limit ranges from about $472,000 in lower-cost areas to over $1 million in high-cost areas like parts of California and New York. Your lender can tell you the limit for your county. The amount you can actually borrow also depends on your income and debt, not just the FHA limit.

Do I need a co-signer to get an FHA loan?

No, the FHA does not require a co-signer. However, if your credit score or income is borderline, a co-signer with stronger finances can improve your chances of approval. The co-signer's income and debts count toward the lender's calculation, so they must meet the same requirements you do.

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

Yes. Once you have built equity and your credit score improves, you can refinance into a conventional loan and potentially remove the mortgage insurance. This usually makes sense after you have owned the home for a few years and paid down the principal, but your lender can run the numbers to see if it saves you money.

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

Missing payments on an FHA loan works the same way as with any mortgage — late fees apply, and your credit score drops. If you miss three payments, the lender can begin foreclosure. However, FHA loans come with some borrower protections, including the right to request a loan modification if you are struggling. Contact your lender as soon as you know you will miss a payment.