If you’re starting the house-hunting process, you’re likely considering different types of mortgages to finance your purchase. Conventional loans – those that aren’t insured by the government – are the most common, accounting for 78.6% of mortgaged home sales in 2025. But while conventional mortgages tend to offer lower interest rates to buyers with excellent credit scores and stable income, not everyone can qualify. Even if you do, higher-risk borrowers may face less-favorable interest rates.
Fortunately, there are other options. If you’re a first-time buyer – or a borrower with less-than-stellar credit and/or minimal savings – a loan offered through the Federal Housing Administration (FHA) could offer an easier, more affordable path to homeownership. Insured by the government, FHA loans often require less cash up front and lower credit scores to qualify, and they’re available for everything from existing homes to new construction to home improvements.
So, how do FHA loans work? FHA loans are insured by the government, so if you default, the bank still gets paid. Given that they’re less risky for lenders, they’re accessible to a broader range of borrowers. Sound interesting? Don’t sign on the dotted line just yet. Here’s what you need to know about qualifying, costs and determining if an FHA loan is the right fit for you.
Key Takeaways:
- Conventional loans are not insured by the government, but they are a popular option for creditworthy borrowers.
- Unlike conventional mortgages, FHA loans are insured by the Federal Housing Administration, so if a borrower defaults the FHA pays the lender.
- Because they’re insured by the government, FHA loans have more relaxed borrowing standards, so higher-risk buyers can qualify for a mortgage, even if they have low credit scores and can’t make large down payments.
- FHA loans require mortgage insurance premiums to protect the lender, which add to closing costs and monthly payments, potentially making the cost more expensive than conventional loans.
- Borrowers must use an FHA-approved lender in order to apply.
- Properties must be appraised and meet minimum safety standards.
- Home buyers can choose from several different types of FHA loans to fit the type of property they want to purchase.
What Is An FHA Loan And How Does It Work?
An FHA loan is insured by the federal government through the U.S. Federal Housing Administration. That means the FHA reimburses the lender if the homeowner defaults on the mortgage. As a result, FHA loans allow lenders to approve borrowers with lower credit scores and smaller down payments, making them an alternative to conventional loans with stricter credit requirements.
FHA loans offer plenty of advantages, particularly for home buyers who have limited savings or need flexible qualification standards. Down payment minimums are low; generally, you can put down as little as 3.5%. Closing costs – usually 2% – 5% of the loan – can be rolled into your mortgage balance, so you may need less upfront cash.
However, because FHA loans are insured, they require borrowers to pay mortgage insurance premiums (MIP), additional upfront and annual fees that protect the lender if you default. Generally, you’ll pay an upfront mortgage insurance premium of 1.75% of the loan amount, which you can opt to pay at closing or roll into your mortgage. You’ll also have to budget for an annual premium, which varies based on the size and terms of the loan, and gets folded into your monthly mortgage payment. So, while FHA loans require less upfront cash, they may lead to higher monthly payments and more interest expense over the life of the loan.
Because there are specific FHA loan stipulations, you must work with an approved lender in order to access this mortgage. Most major lenders offer FHA loans. How do you find one? The U.S. Department of Housing and Urban Development’s HUD Lender Search List can steer you to an FHA-approved lender in your area.
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What Type Of Borrower Is Ideal For An FHA Loan?
An FHA loan may be right for you if you plan to make a small down payment or have a low credit score. While many conventional loans require a 5% down payment, you can get an FHA loan with just 3.5% down. It may not seem like a huge difference, but it is when you’re making a purchase as expensive as a house. For instance, someone buying a $400,000 house with a 5% down payment would need $20,000, while a 3.5% down payment would be $14,000.
In terms of credit, lenders usually require a credit score of 620 to qualify for a conventional loan. But you’ll need a score of 580 to qualify for an FHA loan with a 3.5% down payment. You could even qualify with a score of 500, but you’ll need a 10% down payment.
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How Do I Qualify For An FHA Loan?
FHA loans are issued based on the following conditions:
FHA mortgage loan limits: FHA loan limits dictate the maximum amount you’re allowed to borrow. In 2026, buyers in most areas of the country can borrow up to $541,287 for a one-unit property. In high-cost areas, the maximum FHA loan amount is $1,249,125. You can borrow even more if purchasing a property in Alaska, Hawaii, Guam or the U.S. Virgin Islands, because of higher construction costs.
Credit score and down payment: Lenders set their own credit score requirements for FHA loans, but the lowest allowable score is 500 with a 10% down payment. You’ll need a score of at least 580 to qualify for a 3.5% down payment.
Debt-to-income ratio: Your debt-to-income ratio (DTI) shows lenders how much of your monthly pretax income is used for monthly debt payments. To find your DTI, add your monthly debt payments (including loan payments and credit card minimum balances) and divide that number by your gross monthly income. Multiply that number to get a percentage.
FHA applicants must have a DTI of 43% or less, including the new home’s mortgage payment. You may qualify with a 50% DTI if you have savings, investment, additional income, or a high credit score to offset the lender’s risk associated with a higher DTI.
FHA Property Qualifications
The property you’re buying must also meet certain requirements for an FHA loan.
FHA appraisal: In order to get your loan approved, the property must be appraised by an FHA-approved appraiser who will estimate the home’s current market value to ensure it’s at least as much as the purchase amount. If it’s not, you may need to either negotiate the price, pay the difference between the purchase price and the appraised value or back out of the deal.
FHA minimum property standards: The FHA appraiser also checks to make sure your new home meets minimum property standards. If the property fails inspection, you may need to negotiate with the seller to fix the issues before closing; otherwise, you won’t qualify for an FHA loan.
Appraisers will confirm the home is:
- Safe: The FHA appraiser will ensure the property is free of hazards. Dangers like exposed wiring, gas leaks and missing railings could endanger the buyers. Plumbing and heating systems must be working properly, and electrical systems must be up to code.
- Secure: The appraiser will ensure doors and windows close and lock, and that you can safely access roads.
- Structurally sound: Appraisers will check that the foundation, roof, drainage and walls are in acceptable condition. They will also evaluate the attic to ensure it’s properly ventilated and has the adequate installation.
FHA mortgage insurance: Borrowers must pay an upfront and annual mortgage insurance premium (MIP) to offset risk to the lender. These premiums are deposited into the Mutual Mortgage Insurance Fund (MMIF), which reimburses the lender if the borrower defaults. The upfront MIP is 1.75% of the loan amount. The annual MIP varies based on the size of your down payment and terms of the loan. For borrowers with less than a 5% down payment, the annual fee is 0.55% of the current loan amount.
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Types Of FHA Loans
There are several types of FHA loans to choose from, depending on the type of property you plan to buy.
| Type Of FHA Loan | Used For | Requirements |
|---|---|---|
| FHA 203(b) | Primary residence with one to four units | Minimum down payment is 3.5% with a 580 credit score or higherProperty appraisal must meet purchase price and FHA safety standards |
| FHA 203(k) Rehabilitation Loan | Properties that need significant repairs; buyers can include repair costs in the mortgage | Property is at least a year oldImprovements or repairs total at least $5,000Must work with a licensed contractor |
| FHA Construction-To-Permanent Loan | New-home build | Construction must be done by a licensed, FHA-approved contractorAppraisal is required to confirm minimum property standards |
| FHA Energy Efficient Mortgage Program | Finance energy-efficient improvements within your FHA mortgage | Maximum cost of improvements to add to mortgage is the greater of 5% of the property’s value (up to $8,000) or $4,000Homeowner may be approved to complete installation |
| FHA Cash-Out Refinance | Refinance your current mortgage while cashing out equity | Must own the home for at least one yearCan borrow up to 80% of the property’s loan-to-value ratio |
| FHA Streamline Refinance | Refinance an existing FHA loan in order to save money | Mortgage cannot be delinquentRefinance must give a net tangible benefit to the borrower |
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FHA Loans Pros And Cons
FHA loans come with benefits and drawbacks to consider.
| Pros | Cons |
|---|---|
| Low down payment requirements: Applicants with a credit score of 580 or higher may qualify for an FHA loan with just a 3.5% down payment, compared to a 5% minimum with most conventional loans. | Mortgage insurance premiums: Upfront and annual mortgage insurance premiums must be paid by the borrower, adding to closing costs and monthly expenses. Conventional loans with less than 20% equity in the home come with private mortgage insurance, but it’s paid either up front or annually – usually not both. Also, if you put down less than 10% on an FHA loan, you must pay annual mortgage insurance premiums for the life of the loan. With conventional loans, PMI can be removed once you have 20% equity. |
| Flexible credit score requirements: Although each lender can set its own credit criteria, the lowest possible score to qualify for an FHA loan is a 500. | Home requirements: A home must meet the FHA’s strict safety, security and structural requirements. Conventional loans do not have safety or structure requirements beyond being inhabitable for the entire year. |
| Competitive interest rates: FHA mortgage rates are often lower than conventional mortgages. That may help offset the annual mortgage insurance premium, but it’s smart to compare the total cost of your loan with other options. | Loan limits: FHA loan limits are lower than conventional loan thresholds. |
| Closing costs: You can roll closing costs into your FHA loan to help reduce the amount of cash you’ll need up front. | More expensive for good credit borrowers: Borrowers with good credit may spend more overall with an FHA loan. |
| May be more affordable for low-credit borrowers: Conventional loans tend to carry higher interest rates for lower-credit borrowers because they’re not federally guaranteed. |
How To Apply For An FHA Loan
Once you’ve found an FHA-approved lender, follow these steps to complete the application process:
- Gather documentation: Lenders typically require pay stubs, W-2s, bank statements and photo ID.
- Submit your application: Your lender will check your credit score, verify income sources and evaluate the property.
- Pay for an appraisal: Buyers typically pay for the appraisal out of pocket, which can cost between $200 – $2,000 depending on the home’s size and location.
- Respond to lender requests: In some instances, your lender may need additional information. Answer questions quickly so you don’t slow down the closing process.
- Close on your FHA loan: Once the underwriting process is approved, you can close on your loan. This involves signing lots of paperwork and paying your down payment and closing costs.
FAQ
The Bottom Line: Could An FHA Loan Be Right For You?
While an FHA loan isn’t the right fit for every borrower, it can be a good option for home buyers with lower credit scores and limited savings. Its flexible requirements make homeownership more accessible to people who might have a difficult time buying a home with a conventional loan.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
