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An FHA loan helps borrowers with lower credit scores and down payment savings finance a home, sometimes at more affordable FHA loan rates. This type of mortgage is widely available from different types of lenders, including banks and independent mortgage companies. Here’s a complete guide.
An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA), which is overseen by the U.S. Department of Housing and Urban Development (HUD). While the government insures these loans, they’re underwritten and funded by FHA mortgage lenders. Many big banks and other types of lenders offer them.
FHA loans have a low minimum credit score and down payment requirement, which makes them especially popular with first-time homebuyers. You can get an FHA loan with a credit score as low as 580 if you have 3.5 percent of the home’s purchase price to put down, or as low as 500 with 10 percent down. These flexible underwriting standards are designed to help more borrowers become homeowners.
You can’t buy just any home with an FHA loan, however. You can’t use this loan to buy an investment property or vacation home. Based on your credit and finances, the lender determines how much mortgage you’d qualify for within the FHA loan limits for your area.
FHA loans are generally best for homebuyers with lower credit scores, limited down payment savings or both.
FHA loans work like most other mortgages, with either a fixed or adjustable interest rate and a loan term for a set number of years. There are two term options: 15 years or 30.
You’ll also pay closing costs for an FHA loan, such as appraisal and origination fees. The FHA allows home sellers, a home builder or a mortgage lender to cover up to 6 percent of these costs.
To insure these loans against default — that is, if you were to stop repaying your loan — the FHA requires borrowers to pay mortgage insurance premiums, or MIP. These go into the Mutual Mortgage Insurance Fund (MMIF), which helps cover loss claims. Although you’ll pay the premiums as the borrower, FHA mortgage insurance protects the lender — not you.
Here’s an overview of the requirements for an FHA loan:
If you put just 3.5 percent down, the minimum credit score for an FHA loan is 580. You can qualify with a score as low as 500, but you’ll need to make at least a 10 percent down payment. Keep in mind that the FHA sets this limit, but individual lenders might require a higher score.
For an FHA loan, you’ll need a down payment of at least 3.5 percent. This minimum increases to 10 percent if your credit score is between 500 and 579.
FHA loans allow borrowers to use down payment funds from sources other than their savings, such as a gift from family. Borrowers might also be eligible for down payment assistance to help cover the cost.
To meet the DTI ratio requirements for an FHA loan, your combined monthly debt payments, including your mortgage, shouldn’t exceed 43 percent. No more than 31 percent of your income should go toward your mortgage payments.
That said, your lender could make exceptions for your overall DTI up to 45 percent, 50 percent or even 57 percent with an FHA loan, assuming you have mitigating factors like a lot of liquid assets or can make a sizable down payment.
All FHA loans require you to pay mortgage insurance, which is split into two components:
For example, if you’re an FHA borrower who opts for a 30-year term and a 3.5 percent down payment, you’ll pay 0.55 percent of the loan amount, divided by 12 and added to your monthly payment. That means if you borrow $300,000, you’ll pay $1,650 a year — or $137.50 monthly — for MIP.
FHA loans include a process in which a HUD-approved appraiser must assess the property to verify its market value and compliance with HUD’s basic property standards. These standards dictate that the property:
FHA loans have limits on how much you can borrow depending on the type of property you’re financing and where you’re buying.
In 2024, the FHA loan limit for a single-family home in most counties is $498,257, but it can be as high as $1,149,825 in higher-cost areas.
Multifamily properties have higher loan limits, ranging from $637,950 to $3,317,400, depending on the number of units and the location.
You can use HUD’s online search tool to find the limits in your area.
Conventional loans are the most popular type of mortgage. Unlike FHA loans, conventional mortgages are not insured by the government. Here’s a side-by-side comparison of the two:
There are several types of FHA loans, including:
An FHA loan can help you get into a home even with poor credit and limited savings for a down payment. For that reason alone, it’s worth considering. However, FHA loans can be costlier thanks to the mortgage insurance premiums. If you have a stronger credit score — at least 620 — you could qualify for a conventional mortgage even if you can’t put 20 percent down. On a conventional loan, you won’t have to pay mortgage insurance for the entire loan term — you can cancel PMI when you accumulate 20 percent equity in your home.
When you’re ready to apply for an FHA loan, start by confirming your eligibility for the program. If you meet the credit score and DTI requirements, use our affordability calculator to estimate your budget based on your income, expenses and down payment savings. The next step is to explore lenders, narrow down your list of options and apply for a loan. You’ll generally need to provide the past two years’ worth of tax returns, two of your most recent pay stubs, your driver’s license or other official identification and full statements of your assets (checking account, savings account, 401(k) and any other places you hold money).
Compared to conventional loans, FHA loans offer a more generous credit score threshold but similarly come with a mortgage insurance requirement. Compared to VA loans and USDA loans, FHA loans are open to anyone who qualifies. VA loans are only for active-duty military, veterans and surviving spouses, while USDA loans are only for low- to moderate-income homebuyers in certain rural areas.
Everyone who gets an FHA loan pays mortgage insurance. If you put down 10 percent or more, you can get rid of FHA mortgage insurance after 11 years. If you put down less than 10 percent, you’ll pay mortgage insurance until you pay off the loan, sell the home or refinance to a conventional mortgage.
Arrow Right Contributor, Personal Finance
Taylor Freitas is a freelance writer and has contributed to publications including Bankrate, LA Weekly, CNET and ZDNet.
