What Is An FHA Loan?

14 Min Read
Updated Feb. 29, 2024
FACT-CHECKED
Young woman holding up house keys happily toward the photographer.
Written By Dan Rafter

Need a mortgage loan to finance the purchase of a new home but worried that your three-digit credit score might be too low? Or maybe you don’t know if you can come up with the thousands of dollars you’ll need for a down payment.

A loan insured by the Federal Housing Administration (FHA) may be a good option.

What is an FHA loan? It’s a type of mortgage designed to help people with less-than-stellar credit qualify for the financing they need to purchase a home. And in good news for cash-strapped buyers, they may require lower down payments, too.

How Do FHA Loans Work?

FHA loans differ from conventional mortgage loans, which aren’t insured by any government agency. Though the government insures FHA loans, it doesn’t originate them. So, if you’re interested in applying for this type of loan, you’ll work with a private mortgage lender.

You can qualify for an FHA loan with a lower credit score than most lenders require with conventional mortgages. These loans also require a lower down payment, making them a good fit for borrowers who haven’t saved as many dollars before buying a home. There are also other requirements specifically for this type of loan, including ones for the property you intend to buy.

See What You Qualify For

FHA Home Loan Requirements 

Knowing what you need to qualify for an FHA loan can help ensure a smooth home buying process.

  • Credit score: You can qualify for an FHA loan with a FICO® credit score as low as 500, depending on your lender. You will, though, have to come up with a larger down payment if your score is that low. And even though the FHA only requires a score of at least 500 many lenders won’t approve you for this type of loan if your credit score is below 580.
  • FHA appraisal: Before you can close on the purchase of a home, you must get an appraisal of the property by an FHA-approved appraiser. There are two goals with this step. First, the appraiser will make sure that the home is safe. Secondly, the appraiser will determine the home’s current market value. This is important because your lender won’t lend you more mortgage money than the home is worth. The appraisal is a way for your lender to determine that you aren’t paying too much for your new home.
  • Move-in plans: The FHA requires that a borrower must move into a home that they’re using as their primary residence within 60 days of closing on the mortgage. At least one borrower who has signed the mortgage note must live in the home for most of a calendar year for the property to be considered a primary residence.
  • Down payment: If your FICO® credit score is at least 580, FHA loans require a minimum down payment of just 3.5% of your home’s purchase price. If your home costs $350,000, you’d need a down payment of at least $12,250. If your FICO® credit score is at least 500, you’d need a minimum down payment of 10% of your home’s purchase price. For that $350,000 house, then, you’d need a down payment of at least $35,000.

FHA Property Requirements

The FHA also has guidelines, known as FHA minimum property standards, that govern the condition and types of homes that are eligible for purchase with an FHA loan.

For example, you can only purchase a primary residence with an FHA loan. This means that you can’t use FHA-insured financing to buy an investment property or second home.

Any home you buy with an FHA loan must also meet certain property standards. These standards center around three main focus areas: safety, security and soundness. Any home you buy with an FHA mortgage should provide a safe environment, shouldn’t have any serious structural defects and should provide a secure place for owners to live.

FHA-approved appraisers will keep these requirements in mind while analyzing the home you want to buy. If the appraiser finds serious structural issues, for instance, you might not be able to use an FHA loan to finance the purchase of the property.

The FHA is flexible on the types of homes you can buy. According to its guidelines, you can use this type of financing to purchase:

  • Single-family homes
  • Condominiums
  • Manufactured homes
  • Multifamily properties of up to four units

FHA Down Payment Requirements

One of the main reasons to apply for an FHA loan is the FHA’s low down payment requirements. You can qualify for an FHA loan with a down payment as low as 3.5% if your credit score is 580 or higher. If your FICO® score is 500 to 579, you’ll have to provide a minimum required down payment of 10% of your home’s purchase price.FHA loans have more favorable terms when you credit score is at least 580. If you need the lower down payment option, you can work to increase your credit score.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Mortgage Insurance And FHA Loans

FHA loans don’t come free. You’ll have to pay both an upfront and annual mortgage insurance premium (MIP). These forms of insurance protect your lender in case you stop making your monthly payments.

Upfront Mortgage Insurance Premium (UFMIP)

You’ll pay the UFMIP at the closing of your mortgage loan. This premium comes out to 1.75% of your loan amount. If you take out a loan for $325,000, your upfront mortgage insurance premium will be $5,687.50.

You can either pay this as one lump sum when you close on your mortgage, or you can roll the payment into your total loan amount. If you choose the latter option, you’ll pay off your upfront payment over time with each monthly mortgage payment.

Annual Mortgage Insurance Premium (MIP)

You’ll also pay an annual MIP each year. The amount of your annual MIP will vary depending on your loan’s amount and length and your loan-to-value ratio (LTV), a measure comparing how much you owe on your mortgage to the current market value of your home.

For mortgage loans of $726,200 or less with terms of more than 15 years, you’ll pay:

  • 50% of your loan amount if your loan-to-value ratio is up to 90%
  • 50% of your loan amount if your loan-to-value ratio is 90% to 95%
  • 55% of your loan amount if your loan-to-value ratio is higher than 95%

For mortgage loans of more than $726,200 with terms of more than 15 years, you’ll pay:

  • 70% of your loan amount if your loan-to-value ratio is up to 90%
  • 70% of your loan amount if your loan-to-value ratio is up 90% to 95%
  • 75% of your loan amount if your loan-to-value ratio is above 95%

For mortgage loans of $726,200 or lower with terms of less than 15 years, you’ll pay:

  • 15% of your loan amount if your loan-to-value ratio is up to 90%
  • 40% of your loan amount if your loan-to-value ratio is above 90%

For loans of more than $726,200 with terms of less than 15 years, you’ll pay:

  • 15% of your loan amount if your loan-to-value ratio is up to 78%
  • 40% of your loan amount if your loan-to-value ratio is 78% to 90%
  • 75% of your loan amount if your loan-to-value ratio is above 90%

Removing Mortgage Insurance

Depending on the size of your down payment you might not be able to remove your annual mortgage insurance premium. If you make a down payment of at least 10% when you buy your home, your annual MIP will disappear automatically after 11 years of monthly payments.

If you make less than a 10% down payment, you’ll have to pay your annual MIP throughout the life of your loan.

Types Of FHA Loans

You can choose from several different FHA loans depending on your housing needs.

Standard FHA Loan

The FHA 203(b) loan is the basic FHA loan that most home buyers who apply for FHA financing take out.

  • You can only use these loans to buy a primary residence of one to four units.
  • The minimum down payment is 3.5% of your home’s purchase price with a FICO® credit score of 580 or higher and 10% with a FICO® credit score of 500 to 579.
  • An FHA-approved appraiser must determine your home’s current market value and whether it meets all FHA safety requirements.

FHA 203(k) Construction Loan

If you’re buying a home that needs significant repairs, you can apply for the FHA’s 203(k) rehabilitation mortgage, a type of FHA construction loan. With this loan, you can cover both the purchase price of your home and the costs of renovating it. Say your home costs $200,000 and a licensed contractor estimates that it will cost $50,000 to renovate it, you’d take out an FHA 203(k) rehab mortgage of $250,000.

  • The home you’re buying must be at least 1 year old.
  • The costs of improvements and repairs must be at least $5,000.
  • You must work with a licensed contractor on a rehab plan that lists the estimated costs of repairs.

FHA One-Time Close Construction-To-Permanent Loan

You can use an FHA construction-to-permanent loan to build a new home. You can finance the purchase of the land on which your home will sit, the construction costs of your new home and the permanent loan you’ll take out to pay for this new property.

Once the construction of your home is finished, this loan will automatically convert to a permanent mortgage loan that you’ll pay back with regular monthly installments with interest.

  • This loan requires just one closing date.
  • The FHA requires that you work with a licensed contractor or builder to construct your home.
  • The FHA also requires an appraisal to confirm that the home you’re building meets the minimum property requirements.

FHA Energy-Efficient Mortgage Program (EEM)

If you want to make your current home more energy efficient or add energy efficient features to a home you’re buying? The FHA’s Energy-Efficient Mortgage Program (EEM) can help.

Under this program, you’d apply for a mortgage larger than your home’s purchase price. You’d then use the extra dollars to fund updates that will boost your current home’s energy-efficiency or the efficiency of a home that you’re buying.

  • The FHA requires that you work with a qualified home energy professional to identify the energy-efficiency measures that work best for your home.
  • The FHA will only approve updates that it considers cost-effective.

FHA Cash-Out Refinance

With an FHA cash-out refinance you refinance your current mortgage to a new loan insured by the FHA. But your new loan will be for more than what you owe on your current mortgage. You then receive the extra money in a single payment that you can spend on whatever you’d like, including home repairs, consolidating high-interest-rate credit card debt or covering a child’s college tuition.

Say you owe $200,000 on your mortgage. You can refinance to a new FHA loan of $300,000 and use the extra $100,000 on whatever you’d like. You’d then pay back the full $300,000 that you borrowed, plus interest, with regular monthly payments.

  • You’ll need an appraisal from an FHA-approved appraiser to determine the current market value of your home.
  • You can borrow up to a certain percentage – usually 80% — of your home’s appraised value.
  • You’ll need to meet all the credit score and income requirements of an FHA loan.

FHA Streamline Refinance

Want a quick refinance that might not require much paperwork on your part? Consider an FHA Streamline Refinance. This is when you refinance an existing FHA-insured mortgage to another FHA loan. If you do this, you might not need to provide your lender with copies of such documents as your last two paycheck stubs, last 2 years of income tax returns and most recent bank account statements. As the name suggests, a streamline refinance can close faster than a typical refinance.

  • The loan you are refinancing must already be insured by the FHA.
  • Your new loan must also be insured by the FHA.
  • You must be current on the payments of your existing mortgage.

FHA Loan Pros And Cons: At A Glance 

As with all mortgage types, there are pluses and minuses involved in applying for an FHA mortgage.

Pros and Cons of FHA Loans

PROS

CONS

Only need a down payment of 3.5% of your home’s purchase price.

You could get a conventional loan for 3% or other government-insured loan (like USDA or VA) with no down payment required.

Available to borrowers with FICO credit scores as low as 500.

If your FICO® Score is lower, your lender will typically charge you a higher interest rate. Not all lenders will approve you for an FHA loan if your credit score is below 580.

You can roll your closing costs into your monthly mortgage payments, meaning that you won’t have to pay them in one lump sum when you close on your loan.

You will have to pay both an upfront and annual MIP.

FHA Vs. Conventional Loans: At A Glance

Wondering about the differences between FHA Vs. conventional loans? The main difference is that while FHA loans are insured by the government, conventional loans are not insured by any government agency.

Loan Type

FHA

Conventional

Minimum credit score

500, though many lenders require at least 580

Typically 620, though it varies by lender

Maximum debt-to-income ratio (DTI)

Varies, but can go up to 57% with compensating factors

Varies, but can go up to 50%

Down payment requirements

3.5% for borrowers with credit scores of 580 or higher; 10% for borrowers with FICO credit scores of 500 to 579

As low as 3% depending on mortgage program

Loan limits

In 2024, home buyers can borrow up to $498,257 for single-family homes in most parts of the country. In high-cost areas, buyers can borrow up to $1,149,825. In Alaska, Hawaii, Guam and the U.S. Virgin Islands, they can borrow up to $1,724,725.

Home buyers can borrow up to $766,550 and still qualify for a conventional mortgage in 2024 in most parts of the country. In certain high-cost areas of the country, this limit increases to $1,149,825.

Is An FHA Loan Right For You?

An FHA loan isn’t right for everyone, but it might make sense if:

  • You are saving for a down payment: If your FICO® credit score is high enough – at least 580 – you’ll only need a down payment of 3.5% of your home’s purchase price.
  • You have a lower credit score: You can qualify for an FHA loan if your FICO® credit score is as low as 500, depending on your lender.
  • Your income isn’t high: You can qualify for an FHA loan as long as your DTI is under 57%, with compensating factors .

FHA Loan FAQs

If you’re considering this type of loan, you may still have some questions. Below are the answers to some of the most common questions about FHA loans.

How do I apply for an FHA loan?

The FHA insures loans but doesn’t originate them. You’ll work with a private mortgage lender to apply for this loan. Most lenders will require such documents as your most recent paycheck stubs, tax returns and bank statements to verify your income. They’ll also check your credit report and credit score.

Can I refinance an FHA loan? 

You can refinance out of an FHA loan to another FHA loan or a conventional loan. If you refinance an existing FHA loan to another, you might qualify for an FHA streamline refinance. These refinances require less paperwork and usually close faster.

How many FHA loans can I have?

You might wonder how many FHA loans you can have at one time. Usually, the answer is one. That’s because you can only use an FHA loan to finance the purchase of a primary residence. You can’t use these loans to finance the purchase of an investment home or vacation home.

The Bottom Line

While an FHA loan isn’t right for all borrowers, it might make sense for home buyers with lower credit scores and a smaller amount of savings. If you’re ready, start the and get help determining the right loan for your financial situation.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

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