What an FHA Loan Is
An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency. The FHA does not lend you money directly — a bank or mortgage lender does. What the FHA does is promise to cover the lender's loss if you stop paying. Because the government takes that risk, lenders are willing to accept buyers with lower credit scores, smaller down payments, and less savings than they would for a conventional loan.
The trade-off is that you pay an extra insurance fee, called mortgage insurance premium or MIP. This protects the lender, not you. You pay it as part of your monthly mortgage payment and sometimes as an upfront cost at closing.
FHA loans are used to buy single-family homes, townhouses, and some multi-unit properties. You cannot use an FHA loan to buy investment property or a vacation home — only a place where you will live.
Key Takeaways
- An FHA loan is a mortgage where the government guarantees the lender will be paid back, allowing lenders to accept lower credit scores and smaller down payments.
- You pay mortgage insurance premium (MIP) as part of your monthly payment and sometimes upfront, which protects the lender if you default.
- Down payments on FHA loans are typically 3.5 percent of the home price, compared to 5 to 20 percent on conventional loans.
- Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — must usually be below 43 percent to get an FHA loan.
- The home must meet FHA property standards, meaning it has to be safe, structurally sound, and have working utilities.
How Much You Need to Put Down
With an FHA loan, your down payment is typically 3.5 percent of the home's purchase price. On a $200,000 home, that is $7,000. With a conventional loan, lenders usually want 5 to 20 percent down.
The remaining amount you borrow is the mortgage itself. Because you are putting down less money, the loan amount is larger, and so is your monthly payment. The smaller down payment is the main reason people choose FHA loans — it is easier to save $7,000 than $40,000.
You can use a gift from a family member to cover part or all of your down payment. The lender will ask for a letter from the person giving you the money, stating it is a gift and not a loan you have to repay.
Credit Score and Debt Requirements
FHA lenders typically want a credit score of 580 or higher. Some lenders will go lower, but rates and terms get worse as your score drops. A score of 620 or higher usually gets you better terms.
Your debt-to-income ratio is the total of all your monthly debt payments divided by your gross monthly income. This includes car loans, student loans, credit card minimums, child support, and the new mortgage payment. Most FHA lenders want this ratio to be 43 percent or lower. Some will go to 50 percent if you have strong savings or a high credit score.
If you are self-employed, the lender will ask for two years of tax returns and may average your income across those years. If your income varies, expect the lender to use a lower number to be conservative.
Mortgage Insurance Premium and What It Costs
Mortgage insurance premium comes in two parts. The upfront MIP is usually 1.75 percent of the loan amount and is paid at closing. On a $193,000 loan, that is about $3,378. Many borrowers roll this into the loan amount instead of paying it in cash.
The annual MIP is paid monthly as part of your mortgage payment. The rate depends on your down payment and the loan amount, but it typically ranges from 0.55 to 0.80 percent of the loan per year. On a $193,000 loan, that is roughly $106 to $154 per month.
You cannot remove MIP from your payment the way you can with conventional loans. On a conventional loan, once you have paid down the principal to 80 percent of the home's value, you can request to stop paying private mortgage insurance. With FHA loans, MIP stays for the life of the loan if your down payment was less than 10 percent. If you put down 10 percent or more, MIP drops off after 11 years.
Property Requirements and the Home Inspection
The home you buy must meet FHA property standards. It has to be safe, structurally sound, and have working utilities — water, electric, heat, and sewage. The roof cannot be in poor condition, the foundation cannot have major cracks, and there cannot be signs of pest damage or mold.
The lender orders an FHA appraisal to check these things. This is different from a standard appraisal. An FHA appraiser looks at safety and condition, not just market value. If the home fails inspection, the seller must fix the problems before closing, or you can walk away from the deal.
Common reasons homes fail FHA inspection are missing handrails on stairs, inoperable heating systems, exposed wiring, and water damage. These are fixable, but they delay closing.
How FHA Loans Compare to Conventional Loans
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% | 5% to 20% |
| Minimum credit score | 580 (some lenders lower) | 620 to 680 (varies by lender) |
| Mortgage insurance | Required; stays for life of loan if down payment under 10% | Required if down payment under 20%; can be removed at 80% LTV |
| Debt-to-income limit | 43% to 50% | 36% to 43% |
| Property inspection | FHA appraisal checks safety and condition | Standard appraisal checks market value |
| Loan limits | Varies by county; typically $420,000 to $970,000 | No federal limit; set by lender |
FHA loans are easier to get if you have a lower credit score or less money saved. Conventional loans are better if you have a larger down payment and want to avoid paying mortgage insurance for the full life of the loan.
Frequently Asked Questions
Can I use an FHA loan to buy a second home or investment property?
No. FHA loans are only for primary residences — homes where you will live. You cannot use an FHA loan to buy a vacation home, rental property, or investment property. The lender will ask you to sign a statement confirming you intend to live in the home.
What happens if I pay off my FHA loan early?
You can pay off an FHA loan at any time without penalty. When you pay it off, you stop paying mortgage insurance. If you refinance into a conventional loan later, you can drop the insurance once your loan balance reaches 80 percent of the home's current value.
Do I need a job to get an FHA loan?
You need steady income, but it does not have to be from employment. Self-employed income, rental income, Social Security, pension, and disability payments all count. The lender will ask for documentation — tax returns, bank statements, or award letters — to verify the income is real and ongoing.
Can I get an FHA loan if I have had a foreclosure or bankruptcy?
Yes, but there are waiting periods. After a foreclosure, you typically must wait three years. After a Chapter 7 bankruptcy, the wait is usually two years from discharge. After a Chapter 13 bankruptcy, you may be able to borrow while the plan is still active if you have made on-time payments. Ask the lender about their specific timeline.
What is the maximum loan amount for an FHA loan?
FHA loan limits vary by county and change each year. In most areas, the limit is around $420,000 to $766,550 for a single-family home, though limits are higher in expensive markets. Your lender can tell you the limit for your county. The limit is the maximum the FHA will may provide — you can borrow more, but the extra amount is not backed by the FHA.