An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency that backs the loan if you stop paying

An FHA loan is a home mortgage where the Federal Housing Administration promises to cover the lender's loss if you default. This insurance lets lenders approve borrowers with lower credit scores, smaller down payments, and less savings than conventional mortgages require. The lender still expects you to repay the full amount — the FHA insurance straightforward protects the bank, not you.

The key difference from a conventional loan is that FHA loans have lower barriers to entry. You can put down as little as 3.5 percent of the home's purchase price, whereas conventional loans typically ask for 5 to 20 percent. Your credit score can be lower — some lenders will work with scores in the 580 range for FHA loans, while conventional loans often start at 620 or higher. The tradeoff is that you pay mortgage insurance premiums on top of your regular payment, and those premiums stay on your loan for the life of the mortgage (or until you refinance into a conventional loan).

Key Takeaways

  • FHA loans let you buy a home with a down payment as low as 3.5 percent and credit scores as low as 580, making homeownership possible for people who cannot save a large down payment.
  • The Federal Housing Administration insures the loan, meaning the government backs it if you default, but you still owe the full amount to the lender.
  • You pay mortgage insurance premiums — an upfront fee and a monthly fee — that protect the lender, not you, and these costs stay with the loan unless you refinance.
  • FHA loans have limits on how much you can borrow, and these limits change by county and are set each year by the government.
  • The property must meet FHA standards for safety and livability, which means some older or damaged homes will not may have access to.

How FHA insurance works and what it costs you

When you get an FHA loan, you pay two insurance premiums. The first is an upfront mortgage insurance premium (UFMIP), which is a one-time fee of 1.75 percent of the loan amount. This is usually rolled into your loan balance, so you do not pay it out of pocket at closing — you pay it back over time as part of your monthly payment.

The second is an annual mortgage insurance premium (MIP), which you pay monthly as part of your regular payment. The rate depends on your down payment and the size of your loan. If you put down less than 10 percent, you will pay MIP for the entire life of the loan. If you put down 10 percent or more, MIP drops off after 11 years. These premiums are not optional — they are required on every FHA loan.

The insurance protects the lender, not you. If you stop paying, the FHA reimburses the bank for its loss, but you are still responsible for the debt. The insurance straightforward makes it possible for the lender to take the risk of lending to you in the first place.

Down payment and credit score requirements

FHA loans allow down payments as low as 3.5 percent of the purchase price. If you are buying a $200,000 home, you would need $7,000 down. This is significantly lower than conventional loans, which typically require 5 to 20 percent.

Credit score requirements are also more flexible. Most lenders will approve FHA loans with a credit score of 580 or higher. Some lenders work with scores as low as 500 if you put down 10 percent instead of 3.5 percent. Conventional loans usually require a score of 620 or higher, and better rates go to borrowers with scores above 740.

Even with a lower credit score, you still need to show that you can afford the monthly payment. Lenders look at your debt-to-income ratio — the percentage of your monthly income that goes toward debt payments. FHA loans typically allow ratios up to 50 percent, though most lenders cap it at 43 percent. This means if you earn $4,000 a month, your total debt payments (including the new mortgage) should not exceed $1,720 to $2,000.

Loan limits and what properties may have access to

The FHA sets a maximum loan amount each year, and this limit varies by county. In lower-cost areas, the limit might be around $420,000. In high-cost areas like parts of California or New York, the limit can exceed $1 million. You can find your county's current limit on the HUD website, which updates annually.

The property itself must meet FHA standards. It has to be your primary residence — you cannot use an FHA loan to buy an investment property or vacation home. The home must be safe, structurally sound, and meet local building codes. An FHA appraiser will inspect the property and may reject it if there is significant damage, mold, lead paint hazards, or other safety issues. Older homes sometimes fail inspection because of these requirements.

You can use an FHA loan to buy a single-family home, a condo, or a townhouse. Some condos are FHA-approved and some are not — the condo complex itself has to meet FHA standards. Your lender can tell you whether a specific property or condo building is approved.

The difference between FHA loans and conventional mortgages

The main advantage of an FHA loan is accessibility. If you have a lower credit score, limited savings, or both, an FHA loan may be your path to homeownership when a conventional loan is not possible. The lower down payment requirement means you do not have to wait years to save 20 percent.

The main disadvantage is cost. Mortgage insurance premiums add hundreds of dollars to your monthly payment, and on an FHA loan with less than 10 percent down, you pay them for the life of the loan. A conventional loan with a higher down payment may have a lower total cost over time, even though the upfront barrier is higher.

Conventional loans also offer more flexibility. You can refinance into a conventional loan once you have built equity and your credit improves, which lets you drop the mortgage insurance. FHA loans are designed as a stepping stone — many borrowers use them to buy their first home, then refinance into a conventional loan later.

What happens after you get an FHA loan

Once your FHA loan closes, you own the home and make monthly payments to your lender. The FHA insurance stays in place for as long as you have the loan. If you sell the home or refinance into a conventional loan, the FHA insurance ends.

You are responsible for property taxes, homeowners insurance, and maintenance — the same as with any mortgage. If you fall behind on payments, the lender can foreclose, and the FHA insurance covers the lender's loss, but you lose the home and damage your credit.

If your financial situation improves and you want to drop the mortgage insurance, you can refinance into a conventional loan. This usually makes sense once you have at least 20 percent equity in the home and your credit score has risen. A mortgage professional can tell you whether refinancing saves you money in your specific situation.

Frequently Asked Questions

Can I use an FHA loan to buy an investment property or rental home?

No. FHA loans are only for primary residences — homes where you will live as your main address. You cannot use an FHA loan to buy a second home, vacation property, or rental investment. Conventional loans are the option for investment properties.

What if my home fails the FHA inspection?

If the appraiser finds safety or structural issues, the seller can make repairs and have the home re-inspected, or you can negotiate a lower price to account for the repairs you will make yourself. If the seller will not fix it and you will not accept it as-is, the deal ends and you can walk away without penalty.

Can I refinance out of an FHA loan to remove the mortgage insurance?

Yes. Once you have built equity and your credit score has improved, you can refinance into a conventional loan, which does not require mortgage insurance if you have 20 percent equity. This usually makes sense after several years of payments, though a lender can calculate whether it saves you money in your situation.

Do I need a certain credit score to get an FHA loan?

Most lenders require a credit score of 580 or higher for the standard 3.5 percent down payment. Some lenders will work with scores as low as 500 if you put down 10 percent instead. Your score affects your interest rate — a higher score gets a lower rate.

What is the difference between the upfront and annual mortgage insurance premiums?

The upfront premium (UFMIP) is 1.75 percent of the loan amount, paid once and rolled into your loan balance. The annual premium (MIP) is a monthly fee based on your down payment and loan size. Both protect the lender if you default, and both are required on FHA loans.