What an FHA loan is and how it differs from a conventional mortgage

An FHA loan is a mortgage insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD). The FHA does not lend the money itself — a bank or mortgage lender does. What the FHA does is insure the loan, meaning if you stop paying, the FHA compensates the lender for most of the loss. This insurance lets lenders offer mortgages to borrowers who might not meet the stricter requirements of a conventional loan.

The main practical difference: FHA loans require a smaller down payment (as low as 3.5 percent of the home price) and are more forgiving about credit scores and past financial problems. A conventional loan typically requires 5 to 20 percent down and stricter credit history. In exchange, you pay mortgage insurance premiums — an upfront fee and an annual fee — that conventional borrowers with larger down payments may avoid.

FHA loans are used to buy single-family homes, townhouses, and condominiums. You cannot use an FHA loan to buy investment property or a second home. The property must be your primary residence.

Key Takeaways

  • FHA loans require a down payment as low as 3.5 percent and accept credit scores as low as 580, making them accessible to first-time buyers and people with past credit problems.
  • You pay mortgage insurance premiums — an upfront fee of 1.75 percent of the loan amount and an annual fee — because the FHA is insuring the lender's risk.
  • The property must be your primary residence, and you must have a steady income history that a lender can verify, though the income does not have to be recent.
  • The FHA sets a maximum loan amount that varies by county; your lender will tell you the limit for your area.
  • An FHA loan is issued by a bank or mortgage company, not by the government — the FHA only insures it.

Down payment, credit score, and income requirements

FHA loans require a down payment of at least 3.5 percent of the purchase price. If you are buying a $200,000 home, you need $7,000 down. The down payment can come from your own savings, a gift from a family member, or a grant from a nonprofit or government program — but you must document where it comes from.

Credit score requirements are lower than conventional loans. Most lenders will work with a score of 580 or above, though some accept scores as low as 500 if you put down 10 percent instead of 3.5 percent. The FHA itself does not set a minimum score; individual lenders do. If your score is below 620, expect to pay a higher interest rate and have a harder time finding a lender willing to work with you.

Income requirements focus on your debt-to-income ratio — the percentage of your monthly income that goes to debt payments. Most lenders want your total monthly debt (including the new mortgage payment) to be no more than 43 to 50 percent of your gross monthly income. If you earn $4,000 a month, your total debt payments should not exceed $1,720 to $2,000. The FHA does not require a minimum income, but your lender will verify that you have a steady source of income and can document it with tax returns, pay stubs, or bank statements.

Mortgage insurance premiums and what they cover

FHA mortgage insurance protects the lender, not you. It has two parts: an upfront premium and an annual premium.

The upfront mortgage insurance premium (UFMIP) is 1.75 percent of the loan amount. On a $180,000 loan, that is $3,150. You can pay this at closing or roll it into your loan balance, which means you borrow the insurance cost and pay interest on it over 30 years. Most borrowers roll it in because they do not have cash at closing.

The annual mortgage insurance premium (MIP) is paid monthly as part of your mortgage payment. The rate depends on your down payment and the length of your loan. With a 3.5 percent down payment on a 30-year loan, annual MIP is roughly 0.55 percent of the loan balance per year, or about $99 per month on a $180,000 loan. This amount decreases slightly each year as you pay down the principal, but you will pay it for the life of the loan if you put down less than 10 percent.

If you put down 10 percent or more, you can stop paying MIP after 11 years. With a smaller down payment, MIP continues for the full 30 years.

Loan limits by county and property type

The FHA sets a maximum loan amount for each county, which changes annually. These limits are higher in expensive areas and lower in rural areas. In 2024, the limit ranges from roughly $472,000 in low-cost counties to over $1 million in high-cost areas like parts of California and New York.

Your lender can tell you the exact limit for your county and the specific property you want to buy. The limit applies to the loan amount, not the home price — if the limit is $500,000 and you want to buy a $520,000 home, you would need to put down at least $20,000 to stay within the limit.

Loan limits also vary by property type. A single-family home, a duplex, a triplex, and a four-unit building each have different limits. Condominiums must be in an FHA-approved building, which your lender will verify.

The FHA appraisal and property standards

Before the lender approves your loan, an FHA-approved appraiser inspects the home to confirm it meets FHA property standards. These standards may support the home is safe, structurally sound, and worth the purchase price. The appraisal is not a home inspection — it does not check every detail — but it does flag major problems.

Common reasons an FHA appraisal fails: the roof is near the end of its life, the foundation has significant cracks, the electrical or plumbing system is unsafe, or the home has lead paint hazards that have not been addressed. If the appraisal fails, you can ask the seller to make repairs, renegotiate the price, or walk away. You cannot close the loan until the property passes.

The appraisal also confirms the home's value. If the appraised value is lower than the purchase price, you have a problem: the lender will only lend up to the appraised value, so you would need to cover the difference in cash or renegotiate the sale price.

How to start the FHA loan process

The first step is to find a lender that offers FHA loans. Not all banks do, so call ahead or check their website. Once you have chosen a lender, you will meet with a loan officer who will discuss your finances, explain the costs, and tell you how much you can borrow.

You will then provide documents: recent tax returns (usually two years), recent pay stubs, bank statements, and a list of debts. The lender will order a credit report and verify your employment. This process typically takes one to two weeks.

Once the lender gives you a pre-approval letter, you can start house hunting. When you find a home and make an offer, the purchase agreement will include a contingency for the FHA appraisal. After your offer is accepted, the lender orders the appraisal. If it passes, the lender orders a title search to confirm the seller owns the home and there are no liens against it. You will also need homeowners insurance before closing.

Closing usually happens 30 to 45 days after your offer is accepted. At closing, you sign the final loan documents, pay your down payment and closing costs, and receive the keys.

FHA loans versus other options

If you have a higher credit score and more cash for a down payment, a conventional loan may have a lower total cost because you avoid mortgage insurance. However, conventional loans typically require a 5 to 20 percent down payment and a credit score of 620 or higher.

VA loans and USDA loans are other government-backed options. VA loans are for military members and veterans and often require no down payment. USDA loans are for rural properties and also may require no down payment. Both have their own income and property limits.

State and local first-time homebuyer programs sometimes offer down payment help or lower interest rates. These often work alongside an FHA loan — you use the FHA loan to finance the home and a state program to help with the down payment. Your lender or local housing authority can tell you what programs exist in your area.

Frequently Asked Questions

Can I use an FHA loan to buy a home with my family member?

Yes. Both of you can be on the loan as long as you both live in the home and both contribute to the down payment and closing costs. The lender will count both of your incomes and debts when deciding whether to approve the loan.

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

The same thing that happens with any mortgage: the lender will contact you and ask you to pay. If you miss payments for 120 days, the lender can start foreclosure. The FHA insurance protects the lender, not you, so missing payments will damage your credit and put your home at risk.

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

Yes, if your credit score improves and you build equity in the home. Refinancing into a conventional loan can save you money by eliminating mortgage insurance, but you will pay closing costs to refinance. Most people refinance after two to three years of on-time payments.

Do I need a real estate agent to buy a home with an FHA loan?

No. You can buy directly from the seller or work with an agent. The lender does not care. An agent can help you find homes and negotiate the price, but you pay nothing — the seller pays the agent's commission.

What if the home I want to buy is in a flood zone?

You will need flood insurance if the home is in a federally designated flood zone. The lender will require proof of insurance before closing. Flood insurance is separate from homeowners insurance and costs vary widely depending on flood risk.