An FHA loan is a mortgage insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development
The FHA itself does not lend money — banks and mortgage lenders do. What the FHA does is insure the loan, meaning if you stop paying, the FHA compensates the lender for the loss. This insurance lets lenders offer mortgages to borrowers who might not meet the stricter requirements of conventional loans: people with lower credit scores, smaller down payments, or less savings in reserve.
An FHA loan is a real mortgage you repay to a bank or lender over 15 or 30 years, just like any other home loan. The difference is the insurance backing it, which changes the rules around down payments, credit requirements, and the costs you pay upfront and monthly.
Key Takeaways
- FHA loans require a down payment as low as 3.5 percent of the home's purchase price, compared to 5 to 20 percent for many conventional loans.
- Your credit score can be lower for an FHA loan — some lenders work with scores in the 580 range, though 620 or higher is more common.
- You pay mortgage insurance premiums both upfront (at closing) and monthly for the life of the loan, which adds to your total cost.
- FHA loans have debt-to-income limits: your total monthly debt payments (including the new mortgage) cannot exceed 43 to 50 percent of your gross monthly income, depending on the lender.
- The home must meet FHA property standards and be your primary residence; you cannot use an FHA loan for investment properties or vacation homes.
Down payment and credit score requirements
An FHA loan lets you put down as little as 3.5 percent of the purchase price. If you are buying a $200,000 home, that means a $7,000 down payment. Conventional loans typically require 5 to 20 percent down, so this is where FHA loans open the door for first-time buyers or people who have not saved a large amount.
Credit score requirements are also lower. Many FHA lenders will work with a score of 580 or above, though some require 620 or higher. Conventional lenders often want 620 to 680 as a minimum. If you have had late payments, collections, or a bankruptcy in the past, an FHA loan may still be within reach — the FHA has specific waiting periods (usually two years after a bankruptcy discharge, or one year after a foreclosure) before you can borrow again.
Your debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments — also matters. Most FHA lenders cap this at 43 percent, though some go up to 50 percent if you have strong compensating factors like savings or a higher credit score. This ratio includes your new mortgage payment, car loans, student loans, credit card minimums, and any other monthly debt.
Mortgage insurance premiums you pay
Because the FHA is insuring the loan, you pay for that insurance. There are two parts: an upfront premium and a monthly premium.
The upfront mortgage insurance premium (UFMIP) is typically 1.75 percent of the loan amount. On a $193,000 loan (the $200,000 home minus your $7,000 down payment), that is about $3,378. You usually pay this at closing, though you can roll it into the loan amount and pay it over time — which means you pay interest on it.
The annual mortgage insurance premium (MIP) is a monthly payment added to your mortgage bill. The rate depends on the loan amount, how much you put down, and the loan term. For a loan with a 3.5 percent down payment on a 30-year term, the MIP is roughly 0.55 percent of the loan amount per year, paid in monthly installments. On that $193,000 loan, that is about $89 per month. This payment continues for the life of the loan if you put down less than 10 percent — it does not go away once you build equity.
These insurance costs are real money added to what you pay. Over a 30-year loan, they can add tens of thousands of dollars to the total cost of borrowing.
Property standards and occupancy rules
The FHA has minimum property standards the home must meet. A licensed FHA appraiser inspects the property to confirm it is safe, sound, and sanitary. The roof cannot be near the end of its life, the plumbing and electrical systems must work, there cannot be mold or pest damage, and the home cannot be in a flood zone without flood insurance.
These standards protect you — you are not buying a house that will need a new roof in two years — but they also mean some properties will not pass FHA inspection. A home that is too old, too far gone, or in a high-risk flood area may not be FHA-appraised, which means you cannot use an FHA loan to buy it.
You must also live in the home as your primary residence. You cannot use an FHA loan to buy a rental property, a vacation home, or an investment property. The FHA wants to know you are buying a place to live, not to profit from.
Debt-to-income limits and income verification
Lenders use your debt-to-income ratio to decide how much you can borrow. The FHA's standard cap is 43 percent — meaning your total monthly debt payments cannot exceed 43 percent of your gross monthly income before taxes.
If you earn $4,000 per month gross, your debt ceiling is $1,720. If your new mortgage payment will be $1,200, your car payment is $350, and you have a student loan at $150, your total is $1,700 — you fit within the limit. Add a credit card payment of $50, and you are at $1,750, which exceeds 43 percent and may disqualify you unless the lender uses the higher 50 percent threshold.
Some lenders will go up to 50 percent if you have compensating factors: a higher credit score, significant savings, a stable job history, or a co-borrower with strong income. You will need to provide recent pay stubs, tax returns, bank statements, and a list of all debts to prove your income and obligations.
FHA loans versus conventional loans
The main trade-off is this: FHA loans are easier to get if you have a lower credit score or limited savings, but you pay more in insurance costs. A conventional loan has stricter upfront requirements but lower long-term costs if you meet them.
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% | 5% to 20% |
| Minimum credit score | 580 to 620 (varies by lender) | 620 to 680 (varies by lender) |
| Mortgage insurance | Upfront and monthly for life of loan (if down payment under 10%) | Monthly only if down payment under 20%; drops when you reach 20% equity |
| Debt-to-income limit | 43% to 50% | 43% to 50% (varies by lender) |
| Property restrictions | Primary residence only; must pass FHA inspection | Can be primary residence, investment, or vacation property; fewer restrictions |
If you have a 20 percent down payment and a 680 credit score, a conventional loan will likely cost you less over time because you avoid years of mortgage insurance. If you have a 3.5 percent down payment and a 600 credit score, an FHA loan may be your only realistic option.
Frequently Asked Questions
Can I use an FHA loan to buy a second home or rental property?
No. FHA loans are for primary residences only — the home where you will live most of the year. You cannot use an FHA loan to buy an investment property, a vacation home, or a rental. If you want to buy a second property, you would need a conventional loan or a different loan type.
What happens to my mortgage insurance if I pay off the loan early?
If you pay off an FHA loan early, the mortgage insurance stops — you no longer owe monthly premiums. However, you still paid the upfront insurance premium at closing, which you do not get back. The sooner you pay off the loan, the less total insurance you pay in monthly premiums.
Can I remove the mortgage insurance once I build equity?
If you put down 10 percent or more, the mortgage insurance drops after 11 years. If you put down less than 10 percent (like the standard 3.5 percent), the insurance stays for the life of the loan — you cannot remove it by building equity. This is a key difference from conventional loans, where insurance drops once you reach 20 percent equity.
Do I need a co-signer for an FHA loan?
You do not need a co-signer, but having one can help if your income or credit is borderline. A co-signer's income counts toward your debt-to-income ratio, and their credit score factors into the decision. The co-signer is equally responsible for the loan if you cannot pay.
What if the home does not pass the FHA appraisal?
If the appraiser finds serious issues — a failing roof, mold, structural damage — the lender will not approve the loan until those problems are fixed. The seller can repair the issues, or you can negotiate a lower price. If the seller will not fix or reduce the price, you can walk away or try a conventional loan, though conventional lenders have similar inspection standards.