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 money itself — instead, it insures the loan, which means it promises to cover the lender's loss if you stop paying. Because the FHA absorbs that risk, lenders are willing to offer mortgages to borrowers who might not meet the stricter requirements of a conventional loan.

The most visible difference between an FHA loan and a conventional mortgage is the down payment. FHA loans allow down payments as low as 3.5 percent of the home's purchase price, while conventional loans typically require 5 to 20 percent. This lower barrier is why FHA loans are common among first-time homebuyers and people with limited savings.

FHA loans come with mortgage insurance premiums — fees you pay to protect the lender if you default. These premiums are built into your monthly payment and your closing costs, and they do not go away until you have paid down the loan significantly or refinanced into a conventional mortgage.

Key Takeaways

  • FHA loans require a down payment as low as 3.5 percent, making them accessible to borrowers with limited savings.
  • The FHA insures the loan but does not lend the money — your lender is a bank, credit union, or mortgage company.
  • You pay mortgage insurance premiums on top of your regular payment, and these premiums protect the lender, not you.
  • FHA loans have credit score and debt-to-income limits, but they are generally more flexible than conventional mortgages.
  • The home must meet FHA property standards, which means it must be safe, sound, and sanitary before closing.

Credit Score and Debt Requirements

FHA loans do not have a single minimum credit score set by the agency itself. Instead, individual lenders set their own minimums, which typically range from 580 to 640. A score of 580 or higher usually qualifies you for the 3.5 percent down payment option. Scores between 500 and 579 may still get you a loan, but many lenders require a 10 percent down payment at that level.

Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — also matters. Most lenders cap this at 43 percent, meaning your total monthly debt (including the new mortgage payment) cannot exceed 43 percent of your gross monthly income. Some lenders will go as high as 50 percent if you have strong compensating factors, such as a large savings account or a history of on-time payments.

The FHA does not require a minimum savings balance or emergency fund, but lenders often do. Having cash reserves after closing — typically two to three months of mortgage payments — strengthens your process and may lower your interest rate.

Down Payment and Closing Costs

The minimum down payment on an FHA loan is 3.5 percent of the purchase price. On a $200,000 home, that is $7,000. You do not have to save this money yourself — the down payment can come from a gift, a grant, a loan from a family member, or your own savings. The FHA allows down payment gifts from relatives, employers, nonprofits, and government agencies, but the gift must be documented in writing.

Closing costs on an FHA loan typically run 2 to 5 percent of the loan amount and cover the appraisal, title search, inspection, attorney fees, and lender fees. The seller can pay up to 6 percent of the purchase price toward your closing costs, which can significantly reduce what you owe at closing. This is a major advantage over conventional loans, where seller concessions are usually capped at 3 percent.

The upfront mortgage insurance premium is a one-time fee equal to 1.75 percent of the loan amount. This is typically rolled into your loan balance rather than paid at closing, which means you finance it over the life of the mortgage.

Mortgage Insurance Premiums Explained

FHA loans require two types of mortgage insurance: an upfront premium and an annual premium. The upfront premium is 1.75 percent of the loan amount and is added to your loan balance at closing. The annual premium is divided into 12 monthly payments and added to your regular mortgage payment.

The annual premium rate depends on your down payment and the loan term. If you put down 3.5 percent on a 30-year loan, the annual premium is typically 0.55 percent of the loan balance. If you put down 10 percent, it drops to 0.35 percent. These rates can vary slightly by lender and change over time.

Unlike conventional mortgages, FHA mortgage insurance does not automatically fall off once you reach 20 percent equity in the home. If your down payment was less than 10 percent, you will pay mortgage insurance for the entire 30-year loan term. If you put down 10 percent or more, you can stop paying after 11 years. The only way to remove insurance earlier is to refinance into a conventional loan once you have enough equity.

Property Requirements and Inspections

The home you buy with an FHA loan must meet FHA property standards, which are safety and livability requirements set by the agency. The property must have a functioning roof, safe electrical and plumbing systems, working heat, and no significant structural damage. It cannot have lead-based paint hazards (for homes built before 1978), mold, or pest infestations.

An FHA appraiser inspects the property and verifies it meets these standards. This is different from a standard home inspection — the appraiser is checking both the home's value and its condition. If the property fails the FHA inspection, the seller must make repairs before closing, or you can renegotiate the price. You cannot close on an FHA loan until the property passes.

The appraisal also protects you by ensuring you are not paying more than the home is worth. If the appraised value comes in lower than the purchase price, you have the option to renegotiate, walk away, or make up the difference in cash.

FHA Loan Limits and Loan Types

The FHA sets maximum loan amounts that vary by county and property type. These limits change each year and are higher in areas with higher home prices. In 2024, the baseline limit for a single-family home is $498,257 in most counties, but it can be significantly higher in expensive markets like California or New York. You can find your county's limit on the HUD website.

FHA loans come in several varieties. A purchase loan is used to buy a home. A cash-out refinance lets you borrow against your home's equity to pay off debt or fund improvements. A streamline refinance is a simplified process for refinancing an existing FHA loan with less paperwork and no new appraisal required.

FHA loans can be fixed-rate (your payment stays the same for 15 or 30 years) or adjustable-rate (your rate changes after an initial period, usually 3, 5, 7, or 10 years). Most borrowers choose fixed-rate loans because the payment is predictable.

When an FHA Loan Makes Sense

An FHA loan is often the right choice if you are a first-time homebuyer with limited savings, a credit score below 620, or a debt-to-income ratio above 43 percent. It is also useful if you have experienced a past financial setback — FHA lenders are more forgiving of late payments, foreclosures, and bankruptcies if enough time has passed.

The trade-off is that you will pay mortgage insurance for many years, which adds to your total cost. On a $200,000 loan with 3.5 percent down, the annual insurance premium is roughly $1,100 per year, or about $92 per month. Over a 30-year loan, that adds up significantly. If you can save for a larger down payment or improve your credit score to may have access to for a conventional loan, you may save money in the long run.

An FHA loan also makes sense if you are buying a home that needs repairs. Because the seller can contribute up to 6 percent of the purchase price toward closing costs, you can use that money to negotiate repairs or credits instead of paying out of pocket.

Frequently Asked Questions

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

Yes. The FHA allows borrowers with a foreclosure after a waiting period of three years (or two years if extenuating circumstances caused it). Bankruptcy requires a two-year waiting period for Chapter 7 or a one-year waiting period if you are still paying a Chapter 13 plan. Lenders also look at what you have done since — consistent on-time payments and stable income strengthen your case.

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

Conventional loans require higher credit scores (usually 620 or above), larger down payments (5 to 20 percent), and stricter debt-to-income limits (typically 43 percent). They do not require mortgage insurance if you put down 20 percent. FHA loans are more flexible on credit and income but charge mortgage insurance for the life of the loan in most cases.

Do I have to use an FHA-approved lender?

Yes. Only lenders approved by the FHA can issue FHA loans. Most banks, credit unions, and mortgage companies are approved. You can check if a lender is approved on the HUD website or ask them directly.

Can I pay off my FHA loan early without a penalty?

Yes. FHA loans have no prepayment penalty, so you can pay extra toward principal or pay off the loan in full at any time without owing a fee. Paying extra principal reduces the amount of interest you pay over time.

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

Missing a payment triggers late fees and can damage your credit score. If you miss three payments, the lender may start foreclosure proceedings. If you are struggling, contact your lender when ready — many offer loan modification programs or forbearance options that let you pause or reduce payments temporarily.