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 you money directly. Instead, a bank or mortgage company lends you the money, and the FHA promises to cover the lender's loss if you default. This may provide lets lenders offer mortgages to 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.
The trade-off is real: you get access to a loan you might not otherwise get, but you pay more per month because of the insurance cost. The loan itself works like any other mortgage — you borrow a sum, pay it back over 15 or 30 years, and own the house once it is paid off.
Key Takeaways
- An FHA loan is a mortgage backed by government insurance, not a direct government loan, and requires you to pay mortgage insurance as part of your monthly payment.
- You can put down as little as 3.5 percent of the purchase price, compared to 5 to 20 percent on conventional loans, but you must pay insurance for the life of the loan if your down payment is less than 10 percent.
- Credit score requirements are lower than conventional loans — some lenders accept scores as low as 580 — but your debt-to-income ratio cannot exceed 43 to 50 percent depending on the lender.
- The property must be your primary residence, pass an FHA inspection, and meet minimum property standards; investment properties and vacation homes do not may have access to.
- You must have a steady income history, typically shown through recent tax returns and pay stubs, and cannot have a foreclosure in the past three years or a bankruptcy discharge in the past two years.
Down Payment and Mortgage Insurance Requirements
The minimum down payment on an FHA loan is 3.5 percent of the purchase price. On a $200,000 house, that is $7,000. This is lower than most conventional mortgages, which typically require 5 to 20 percent down. The lower barrier makes homeownership reachable for people who have not accumulated large savings.
The cost of this access is mortgage insurance. You pay an upfront insurance premium, usually 1.75 percent of the loan amount, rolled into your loan balance. You also pay an annual insurance premium — typically 0.55 to 0.80 percent of the loan amount per year — split into monthly payments added to your mortgage bill. If your down payment is less than 10 percent, you pay this annual insurance for the entire life of the loan. If you put down 10 percent or more, the insurance drops off after 11 years.
This means your actual monthly payment includes principal, interest, property taxes, homeowners insurance, and the FHA mortgage insurance. On a $200,000 loan at current rates, the insurance alone can add $100 to $150 per month.
Credit Score and Debt-to-Income Limits
FHA lenders typically accept credit scores as low as 580, though some will go lower. Conventional loans usually require 620 or higher. A lower credit score does not automatically disqualify you, but it may result in a higher interest rate. Lenders also look at the reason for any past credit problems — a medical debt that sent you to collections looks different to an underwriter than a pattern of missed payments.
Your debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments — cannot exceed 43 percent for most lenders, though some will stretch to 50 percent if you have strong compensating factors like savings or a high credit score. This includes your new mortgage payment plus all other debts: car loans, student loans, credit cards, child support, and any other monthly obligations. If you earn $4,000 per month, your total debt payments cannot exceed $1,720 at the 43 percent threshold.
Lenders verify income through recent tax returns (usually two years), recent pay stubs, and a letter from your employer confirming your job. Self-employed borrowers need two years of tax returns and sometimes a profit-and-loss statement.
Property Requirements and Inspection Standards
The property must be your primary residence — the place where you live most of the year. Investment properties, vacation homes, and second residences do not may have access to for FHA financing. The house or condo must also pass an FHA appraisal, which is more detailed than a standard appraisal. An FHA appraiser checks that the property meets minimum property standards: the roof is sound, the plumbing and electrical systems work, there is no lead paint hazard (for homes built before 1978), and the property is safe and habitable.
If the appraisal turns up problems — a roof with only a few years of life left, missing handrails on stairs, exposed wiring — the seller must fix them before closing, or the deal falls through. This protects you from buying a house that will need expensive repairs immediately, but it can also kill a deal if the seller refuses to make repairs or the cost is too high.
The property can be a single-family home, a townhouse, or a condo in an FHA-approved condo project. Not all condos are FHA-approved; the condo building itself must meet FHA standards and have FHA approval on file.
Recent Foreclosure and Bankruptcy History
You cannot have had a foreclosure within the past three years. If your house was foreclosed on more than three years ago, you may be able to get an FHA loan, though some lenders require four or five years to have passed. A foreclosure is a serious mark, and lenders want to see that you have rebuilt your finances and housing stability since then.
A bankruptcy discharge must be at least two years old. Chapter 7 bankruptcy (where debts are erased) and Chapter 13 bankruptcy (where you repay debts on a court-approved plan) are both treated this way. If you are still in an active Chapter 13 plan, you cannot get an FHA loan until the plan is complete and discharged. The waiting period exists because lenders want evidence that your financial crisis has passed.
Other credit events — late payments, collections, charge-offs — do not have a hard waiting period, but they will be factored into your overall credit profile and may result in a higher interest rate or require a larger down payment.
Loan Limits and Maximum Borrowing Amount
FHA loans have a maximum amount you can borrow, and this limit varies by county. In lower-cost areas, the limit might be $420,000. In high-cost urban areas like San Francisco or New York, the limit can be $765,000 or higher. You can find your county's limit on the HUD website or by asking a lender.
The limit is based on the median home price in your area, not on your income. Even if you earn enough to may have access to for a larger loan, you cannot borrow more than the FHA limit for your county. This is a hard ceiling, not a guideline.
The actual amount you can borrow also depends on your debt-to-income ratio and credit profile. A lender will calculate the maximum based on your income and debts, then cap it at the FHA limit for your county. Whichever is lower is what you can borrow.
How FHA Loans Differ From Conventional Mortgages
The main differences come down to down payment, credit requirements, and insurance. An FHA loan lets you put down 3.5 percent and accept a credit score as low as 580. A conventional loan typically requires 5 to 20 percent down and a credit score of 620 or higher. Conventional loans also have mortgage insurance, but it drops off once you have paid down the loan to 80 percent of the home's value, whereas FHA insurance is permanent if your down payment is under 10 percent.
FHA loans also have stricter property standards — the appraisal is more thorough, and the property must meet specific safety and habitability requirements. Conventional loans have a standard appraisal but fewer property restrictions.
Interest rates on FHA loans are often slightly lower than conventional rates because the government may provide reduces the lender's risk. However, the mortgage insurance cost can offset this advantage. The total cost — interest plus insurance — may be higher or lower depending on your credit score, down payment, and the current rate environment.
Frequently Asked Questions
Can I get an FHA loan if I have had a late payment in the past year?
Yes. A single late payment does not automatically disqualify you, especially if it was recent and you have since caught up. Lenders look at the pattern and reason — a one-time 30-day late payment on a credit card is treated differently than multiple late payments across several accounts. You may face a higher interest rate, but you can still be approved.
Do I have to use an FHA-approved lender?
Yes. Only lenders approved by the FHA can make FHA loans. Most banks, credit unions, and mortgage companies are FHA-approved. You can ask any lender whether they offer FHA loans; if they do not, they can refer you to one that does.
What happens if the appraisal finds problems with the house?
The seller must repair the issues or credit you money at closing to cover repairs. If the seller refuses or the repairs are too expensive, the deal can fall through. You are not required to buy a house that fails the FHA appraisal, and the lender will not fund the loan until problems are resolved.
Can I refinance an FHA loan into a conventional loan later?
Yes. Once you have built equity and your credit has improved, you can refinance into a conventional loan and potentially drop the mortgage insurance. This usually makes sense after three to five years of on-time payments and when your home has appreciated or you have paid down the principal significantly.
Is there a maximum age for the house, or can I use an FHA loan on an older home?
There is no maximum age, but the house must pass the FHA appraisal and meet minimum property standards regardless of when it was built. An older home can may have access to as long as the roof, plumbing, electrical, and structure are sound and there are no safety hazards. Lead paint testing is required for homes built before 1978.