What an FHA loan is

An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency within the 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 insure the loan, meaning if you stop paying, the government covers the lender's loss. Because the government takes on that risk, lenders are willing to approve borrowers with lower credit scores, smaller down payments, and less savings than they would for a conventional mortgage.

The trade-off is that you pay mortgage insurance premiums — extra monthly costs that protect the lender, not you. These premiums stay on your loan for the life of the mortgage if your down payment was less than 10 percent, or for at least 11 years if it was 10 percent or more. FHA loans are most common among first-time homebuyers, people rebuilding credit, and buyers in lower-income brackets.

Key Takeaways

  • An FHA loan is a mortgage insured by the federal government, allowing lenders to approve borrowers with credit scores as low as 500 and down payments as low as 3.5 percent.
  • You pay mortgage insurance premiums on top of your regular mortgage payment, and these premiums typically remain for the life of the loan if your down payment was under 10 percent.
  • The property must meet FHA standards for safety and condition, which means some older or heavily damaged homes will not may have access to.
  • Debt-to-income limits cap how much you can borrow relative to your monthly income, usually around 43 to 50 percent depending on your credit and down payment.
  • FHA loans have loan limits that vary by county, and you cannot use an FHA loan to buy an investment property or a home worth more than the limit in your area.

Credit score and down payment requirements

FHA loans accept credit scores as low as 500, though most lenders prefer 580 or higher and offer better rates at 620 and above. If your score is between 500 and 579, you will need a down payment of at least 10 percent. If it is 580 or higher, you can put down as little as 3.5 percent. These are the minimum thresholds — your lender may set higher requirements based on their own policies.

The down payment comes from your own savings or from a gift from a family member, employer, or nonprofit organization. You cannot borrow the down payment from another lender. If you are putting down 3.5 percent on a $200,000 home, that is $7,000 out of pocket, plus closing costs of roughly 2 to 5 percent of the loan amount.

Mortgage insurance premiums and what they cover

FHA mortgage insurance has two parts: an upfront mortgage insurance premium (UFMIP) and a monthly mortgage insurance premium (MIP). The UFMIP is typically 1.75 percent of the loan amount and is usually rolled into your mortgage balance rather than paid at closing. On a $200,000 loan, that is $3,500 added to what you owe.

The monthly MIP varies based on your loan amount, down payment, and the length of your loan, but ranges from roughly 0.4 to 1.0 percent of the loan balance per year, paid in monthly installments. If your down payment was less than 10 percent, you pay MIP for the entire life of the loan. If it was 10 percent or more, MIP drops off after 11 years of on-time payments. These premiums protect the lender if you default, not you — they do not buy you anything directly.

Property requirements and appraisals

The home you buy must meet FHA minimum property standards, which means it has to be safe, structurally sound, and free of hazards like lead paint, mold, or faulty wiring. An FHA appraiser will inspect the property and flag any issues. If the home does not meet standards, the seller must fix the problems before closing, or you can walk away. This requirement protects you from buying a money pit, but it also means some older homes, fixer-uppers, and properties in poor condition will not may have access to.

The appraisal also confirms that the home is worth at least what you are paying for it. If the appraisal comes in low, you have a few options: renegotiate the price with the seller, put down more money, or cancel the purchase without penalty.

Debt-to-income limits and loan amounts

Lenders use your debt-to-income ratio (DTI) to decide how much you can borrow. This is the percentage of your gross monthly income that goes toward debt payments — mortgage, car loans, credit cards, student loans, and other obligations. FHA guidelines typically allow a DTI of up to 43 percent, though some lenders will go to 50 percent if you have strong credit and savings. If you earn $4,000 a month and your DTI limit is 43 percent, your total monthly debt payments cannot exceed $1,720.

FHA loan limits also vary by county and change each year. In 2024, the baseline limit for a single-family home is $498,257 in most areas, but it is higher in expensive markets like California and New York. You can find your county's limit on the HUD website. If you want to borrow more than the FHA limit allows, you would need a conventional loan instead.

Who cannot use an FHA loan

You cannot use an FHA loan to buy an investment property, a vacation home, or a rental unit. The home must be your primary residence — the place where you live most of the year. You also cannot use an FHA loan if you are buying a property above the loan limit in your county, or if you have an outstanding FHA loan on another property (though you can refinance an existing FHA loan into a new one).

If you have filed for bankruptcy, you must wait at least two years after a Chapter 7 discharge or one year after a Chapter 13 dismissal or completion before you can get an FHA loan. Recent foreclosures, short sales, and deed-in-lieu transactions also trigger waiting periods, usually three years from the date of the event.

FHA loans versus conventional mortgages

The main advantage of an FHA loan is that it is easier to get approved with a lower credit score and smaller down payment. The main disadvantage is that you pay mortgage insurance for years, which increases your total cost. A conventional loan typically requires a credit score of 620 or higher, a down payment of at least 5 percent (though 20 percent avoids mortgage insurance), and stricter debt-to-income limits. If you can may have access to for a conventional loan with a 10 or 15 percent down payment, the total cost over the life of the loan may be lower because you avoid years of FHA mortgage insurance.

However, if your credit score is below 620 or you cannot save a 10 percent down payment, an FHA loan may be your only realistic path to homeownership. The choice depends on your specific financial situation — there is no universal "better" option.

Frequently Asked Questions

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

Yes, but you must wait three years from the date of the foreclosure before you can get an FHA loan. Some lenders may require a longer waiting period or additional documentation of financial recovery, so ask your lender about their specific policy.

What happens if I put down more than 3.5 percent?

Putting down more reduces your loan amount and your monthly mortgage insurance premium. If you put down 10 percent or more, your mortgage insurance drops off after 11 years instead of lasting the life of the loan. There is no penalty for a larger down payment.

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

Yes. Once your home builds equity and your credit improves, you can refinance into a conventional mortgage to eliminate FHA mortgage insurance. Most people do this after a few years of on-time payments and when the home has appreciated enough that they have at least 20 percent equity.

Do I have to use an FHA loan if I am a first-time homebuyer?

No. First-time homebuyers can use any type of mortgage they may have access to for — FHA, conventional, VA (if military), or USDA (if rural). FHA is popular with first-time buyers because the requirements are less strict, but it is not required or exclusive to that group.

What is the difference between an FHA loan and a VA loan?

VA loans are for military members, veterans, and surviving spouses, and they typically require no down payment and no mortgage insurance. FHA loans are open to anyone who meets the credit and income requirements. If you are military-connected, a VA loan usually costs less overall.