What an FHA mortgage is
An FHA mortgage is a home loan insured by the Federal Housing Administration, a division 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 to pay the lender if you stop making payments. This may provide lets lenders offer mortgages to borrowers who might not may have access to for a conventional loan: people 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 access: an FHA loan may be the only mortgage available to you if your credit is below 620, if you can only put down 3 to 3.5 percent, or if you have recent bankruptcy or foreclosure on your record.
FHA loans are used only to buy a primary residence — the home you live in most of the time. You cannot use an FHA loan to buy an investment property, a second home, or a vacation house.
Key Takeaways
- An FHA mortgage is insured by the federal government, which allows lenders to accept borrowers with credit scores as low as 580 and down payments as small as 3 percent.
- You pay mortgage insurance premiums in addition to your regular payment, which increases your total monthly cost but makes the loan possible for people who would not may have access to for conventional financing.
- FHA loans require a home inspection and appraisal to ensure the property meets basic safety and value standards before the lender will fund the purchase.
- Debt-to-income limits and property type restrictions mean not every home or borrower situation works with an FHA loan, even if you meet the credit and down payment minimums.
Down payment and credit score requirements
FHA loans allow down payments as low as 3 percent of the purchase price. If you are buying a $200,000 home, you would need $6,000 down. Conventional loans typically require 5 to 20 percent down, so the FHA option removes a major barrier for first-time buyers or people who have not had time to save.
Credit score minimums vary by lender, but the FHA itself sets a floor of 580. Some lenders will go lower — as low as 500 — though rates and terms will be less favorable. If your score is between 580 and 619, you will pay higher interest rates than someone with a score of 700 or above. The exact rate depends on the lender and current market conditions.
The FHA also looks at your debt-to-income ratio, which is the percentage of your gross monthly income that goes to debt payments. Most FHA loans require this ratio to be 43 percent or lower, though some lenders will stretch to 50 percent if you have strong compensating factors like savings, stable employment, or a higher credit score.
Mortgage insurance premiums and what they cover
FHA mortgages require two types of insurance: an upfront premium and an annual premium. The upfront premium is typically 1.75 percent of the loan amount and is usually rolled into your mortgage — meaning you finance it rather than paying it in cash at closing. On a $200,000 loan, that is $3,500 added to what you borrow.
The annual premium, called mortgage insurance premium (MIP), is divided into 12 monthly payments and added to your mortgage payment. The amount depends on your loan size, down payment percentage, and loan term. A borrower with a 3 percent down payment pays more per month than one with 10 percent down. The monthly MIP typically ranges from 0.4 to 0.85 percent of the loan amount per year, though this varies.
Unlike conventional mortgage insurance, which you can remove once you have paid down the loan to 80 percent of the home's value, FHA mortgage insurance may stay for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more, the insurance drops after 11 years. This is a significant cost difference and worth calculating before you commit.
Property requirements and inspections
The FHA requires that any home financed with an FHA loan pass a property appraisal and inspection. The appraisal confirms the home is worth at least what you are paying for it — the lender will not lend more than the appraised value. The inspection checks for basic safety and livability: the roof must not leak, the plumbing and electrical systems must work, there must be no lead paint hazards (in homes built before 1978), and the home must have heat.
The inspection is stricter than a typical home inspection a buyer might order privately. Cosmetic issues — peeling paint, worn carpet, outdated fixtures — do not fail an FHA inspection. But structural problems, missing handrails, broken windows, or inoperable utilities will. If the inspection finds problems, the seller must fix them before the sale closes, or you can walk away.
The FHA also has limits on property type. Single-family homes, townhouses, and condos are allowed. Manufactured homes (mobile homes) can may have access to if they meet specific standards. Investment properties, vacant land, and homes in poor condition do not may have access to.
How FHA loans compare to conventional mortgages
The main advantage of an FHA loan is access: you can borrow with a lower credit score and smaller down payment than conventional lenders require. The main disadvantage is cost. Because you are paying mortgage insurance for potentially the entire life of the loan, your monthly payment will be higher than a conventional borrower's payment on the same home.
A conventional loan typically requires a 620 credit score minimum and a 5 percent down payment, though some lenders go lower on both. Conventional mortgage insurance (called PMI) can be removed once you reach 80 percent equity in the home, which happens faster than with FHA insurance. Interest rates on conventional loans are often lower than FHA rates, especially if your credit is strong.
If you have the credit score and savings for a conventional loan, the math often favors it over time. If you do not, an FHA loan may be your only realistic path to homeownership. The choice depends on your specific numbers: credit score, down payment available, income, and how long you plan to stay in the home.
Who FHA loans are designed for
FHA loans work best for first-time homebuyers with limited savings, people rebuilding credit after a difficult financial event, and borrowers with non-traditional income (self-employed, gig work, recent job changes). If you have a credit score below 620 or cannot save a 5 percent down payment, an FHA loan may be the only mortgage available to you.
FHA loans are less useful if you have strong credit, substantial savings, and stable income — a conventional loan will likely cost you less over time. They also do not work if you are buying an investment property, a vacation home, or a home that fails the FHA inspection.
The FHA also limits how much you can borrow based on the county you are buying in. These limits change yearly and are higher in expensive areas. Your lender can tell you the limit for your county and whether the home you want to buy falls within it.
The application and approval process
Applying for an FHA mortgage starts with a lender — a bank, credit union, or mortgage company. You will provide income documentation (pay stubs, tax returns), employment history, bank statements, and a list of debts. The lender will order the appraisal and inspection. You will also need a valid Social Security number and proof of citizenship or legal residency.
The approval process typically takes 30 to 45 days from application to closing, though it can be faster or slower depending on how quickly you provide documents and how busy the lender is. Once you are approved, you will lock in an interest rate, which is usually good for 30 to 60 days. If rates drop during that time, you may be able to refinance later.
One requirement unique to FHA loans: you must attend a homebuyer education course, either online or in person. This course covers budgeting, maintenance, and what to expect as a homeowner. Many nonprofits and community colleges offer these courses free or at low cost.
Frequently Asked Questions
Can I refinance an FHA loan into a conventional loan later?
Yes. Once your credit improves, your income increases, or you build equity in the home, you can refinance into a conventional loan. This removes the mortgage insurance requirement and may lower your interest rate. Most borrowers refinance after two to three years of on-time payments and credit score improvement.
What happens if I miss a payment on an FHA loan?
Missing a payment triggers the same consequences as any mortgage: late fees, credit damage, and eventual foreclosure if you do not catch up. The FHA insurance protects the lender, not you. If you fall behind, contact your lender immediately about forbearance or loan modification options.
Can I use an FHA loan to buy a condo?
Yes, but the condo building must be FHA-approved. The building must meet specific standards for owner occupancy, financial reserves, and insurance. Your lender will check this before approving the loan. Not all condos are FHA-approved, so ask the seller or real estate agent before you make an offer.
Do I have to pay the upfront mortgage insurance premium in cash?
No. The upfront premium (usually 1.75 percent of the loan) is almost always rolled into the mortgage amount, meaning you finance it over 15 or 30 years instead of paying it at closing. This reduces the cash you need at closing but increases your total interest paid.
What is the maximum home price I can buy with an FHA loan?
The FHA sets loan limits by county that change yearly. In 2024, limits range from around $472,000 in low-cost areas to over $1 million in high-cost areas like San Francisco and New York. Your lender can tell you the limit for your county. You can buy a home above the limit, but you would need to put down the difference in cash.