What Is an FHA Loan?
A conventional loan is the most common type of mortgage loan, and it's offered by nearly all lenders. But if your credit isn't in tip-top shape or you have minimal cash savings to buy a home, getting approved for a conventional loan might not be realistic.
Borrowers in this situation might have better luck with an FHA loan, a type of mortgage that's insured by the Federal Housing Administration (FHA) and has more relaxed borrowing criteria, making it ideal for first-time homebuyers. Here's what to know about FHA loans, including their requirements, benefits and drawbacks, and whether an FHA loan might be right for you.
What Is an FHA Loan?
FHA loans are a type of government-backed mortgage geared to homebuyers who may have difficulty qualifying for a conventional loan. FHA loans are considered slightly more risky to the lender since borrowing criteria is less strict, such as allowing lower credit scores and down payments. The government backs the loan to reduce the lender's risk, but the trade-off is that borrowers have to pay mortgage insurance premiums (MIPs), sometimes for the life of the loan.
While FHA loans are insured by the U.S. government (the FHA, more specifically), you obtain one by applying through any FHA-approved mortgage lender. This could be a bank, credit union or online lender. The amount you can borrow with an FHA loan depends on where you live, since housing costs vary greatly across the country.
FHA Loan Requirements
While FHA loans have more lenient borrowing criteria, they still come with several important requirements you should be aware of before applying.
Credit Score and Down Payment Amount
FHA loans are ideal for those who have less-than-perfect credit and may not be able to qualify for a conventional mortgage loan. Borrowers must have a credit score of at least 500 to be eligible for an FHA loan.
The size of your required down payment for an FHA loan depends on your credit score: If your credit score is 500 to 579, you must put at least 10% down. If your credit score is 580 or above, you can put as little as 3.5% down (but you can put down more if you want to).
Learn more: How Much Is a Down Payment on a House?
Debt-to-Income Ratio
All mortgage lenders look at your debt to income ratio (DTI), or your total monthly debt payments as a percentage of your gross monthly income. The higher your DTI, the riskier you appear to lenders since it indicates that a large percentage of your income goes toward debt payments.
Mortgage lenders typically consider two types of DTI: your housing-related expenses (front-end DTI) as well as your total debt expenses, including housing (back-end DTI). To get an FHA loan, you typically can't have a back-end DTI over 43%.
Learn more: Debt-to-Income Ratio Calculator
Mortgage Insurance
An FHA loan requires you to pay mortgage insurance, and the cost is spread across two payment types:
- Upfront payment: One single bulk payment equal to 1.75% of the loan amount is due at closing but can be rolled into your loan financing.
- Annual payment: An additional 0.45% to 1.05% of the remaining loan balance is charged annually for the life of the loan and spread out in monthly payments. There are some exceptions, though: You can stop paying insurance after 11 years if you put down 10% when you took out the loan.
Example: You want to purchase a $400,000 home with an FHA loan and put 5% ($20,000) down. You will pay an upfront mortgage insurance payment at closing of $6,650 (1.75% of $380,000), as well as annual mortgage insurance payments of 0.45% and 1.05% of your remaining loan balance.
No Recent Foreclosures
If you've had your home foreclosed on, you must wait three years until you're able to qualify for an FHA loan. However, if you encounter financial hardship after buying a home with an FHA loan, the FHA has several programs designed to help keep you in your house.
Learn more: How Does a Foreclosure Affect Credit?
Other Requirements
The home must be a primary residence, and you also typically must have a Social Security number and proof of sufficient income or assets that indicate you can afford the mortgage and your other debt obligations.
Types of FHA Loans
Different types of FHA loans are available to homebuyers. In addition to traditional FHA loans, you also have these options:
FHA 203(k) Loans
These are rehabilitation loans intended to help you finance the repair and rehabilitation of a single-family home. There is a standard FHA 203(k) loan, which requires those costs to be at least $5,000, and your home's value must still be within your area's FHA loan limits. Additionally, there are limited 203(k) loans that let you add up to $35,000 to your mortgage to improve, upgrade or repair your home.
Learn more: Mortgages and Loans to Pay for Home Renovations
Home Equity Conversion Mortgage (HECM)
The HECM is an FHA program for seniors ages 62 and older, and it is the only government-backed reverse mortgage. It allows qualified homeowners to withdraw some of the equity they've put into their home for renovations, repairs or living expenses.
FHA Loans vs. Conventional Loans
While an FHA loan and a conventional loan are both mortgages that allow you to purchase a home, their requirements and costs vary.
| FHA Loans | Conventional Loans | |
|---|---|---|
| Down payment | 3.5% or more | Most require at least 3%, often more |
| Credit score | 500+ | 620+ |
| Debt-to-income ratio | 31% or less for housing-related expenses; 43% or less total | 28%-35% for housing-related expenses; 43% or less total, though some lenders may go up to 50% |
| Interest rates | May be lower due to government guarantee | May be higher |
| Loan limits for 2025 | $524,225 in most areas $1,209,759 in high-cost areas | $806,500 for standard conforming $1,209,750 for conforming in high-cost areas |
| Closing costs | 2%-6% of loan amount | 2%-5% of loan amount |
| Mortgage insurance | Required on all loans | Only required if you put less than 20% down |
Pros and Cons of FHA Loans
If you're on the fence about taking out an FHA loan, here are some of the potential upsides and downsides to keep in mind.
Pros
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Less strict borrowing criteria: FHA lenders can accept borrowers with credit scores much lower than with conventional loans, and they may be more lenient with other criteria, such as your debt-to-income ratio. Borrowers who struggle to get approved for a conventional loan may be more successful with an FHA loan.
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Fewer restrictions on down payment: FHA loans may require lower down payments and allow for funds to come as a gift from a family member, employer or charitable organization, which other loan types typically don't permit.
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Ability to finance closing costs: FHA loans let you roll your closing costs into the loan, which makes your mortgage payments higher, but means less money out-of-pocket upfront.
Cons
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Limited mortgage size: FHA loans have limits to mortgage size that are smaller than conventional loans. They vary by location, with larger limits for pricier areas, but if you're looking for a luxury home, it might exceed FHA limits.
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Property type is limited: You can't use an FHA loan for every type of property. You can't use one to buy fixer-uppers or certain foreclosures, and there are strict requirements for condos. Additionally, the property has to be your primary residence, so it can't be used on an investment property. The home you buy with an FHA loan must also meet strict government appraisal standards.
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Ongoing mortgage insurance: FHA loans require mortgage insurance premiums, both upfront and annual (paid monthly). If you made the minimum down payment, the insurance lasts for the life of the loan unless you later refinance to a conventional loan. It can only be canceled after 11 years if you put down 10% or more when you took out the loan.
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Makes buyers less competitive: Some sellers might avoid buyers who use FHA loans. That's because some sellers may assume that FHA borrowers have financial issues and that the transaction may not pan out, or that the buyer won't be interested in paying for any repairs. To make yourself competitive with non-FHA borrowers, you could make a full-price offer or offer to buy the house as-is (though that carries its own risks).
Learn more: FHA vs. Conventional Loans: What's the Difference?
Should You Get an FHA Loan?
Whether you get an FHA loan or a different type of mortgage is a personal decision that comes down to your financial situation, personal goals and preferences. As you weigh your options, here are some times when an FHA loan could be a great option and when it might not be.
When to Consider Getting an FHA Loan
- You have a low credit score. Conventional loans have higher credit score requirements, so if your credit isn't in tip-top shape, it might be easier to qualify for an FHA loan.
- You can't make a large down payment. While some conventional loans have begun offering low down payment options, it's still common to put down a double-digit percentage. If your savings are limited, an FHA loan's low 3.5% down requirement makes it easier to become a homeowner faster.
When to Avoid Getting an FHA Loan
- Your credit score is strong. One of the main appeals of FHA loans is the lower minimum credit score. But if you have good credit and plan to put down 10% to 15%, FHA loans can actually be even more expensive than conventional loans.
- You want to avoid long-term mortgage insurance. If you opt for the minimum down payment amount, you'll have to pay MIP for the life of the loan. You can only cancel it after 11 years if you put down 10% or more.
How to Apply for an FHA Loan
Ready to get started on your homebuying journey? Here are the next steps to apply for an FHA loan.
- Check your eligibility. Review the eligibility and borrowing requirements for FHA loans to ensure you are likely to meet them before taking the time to apply.
- Find an FHA-approved lender. If you have a preferred lender already, ask if they offer FHA loans. Otherwise, use HUD's lender list search to find one near you. Lenders set their own interest rates, so it can pay to shop around and compare quotes.
- Gather your documents. Just like with a conventional loan, you will need to gather and provide documentation on your income, assets, debts and personal identification. Ask your lender for specifics.
- Submit the application. It's wise to submit applications for an FHA loan with more than one lender so you can compare interest rates and terms.
- Review offers and select your loan. Soon after being approved, you will receive preapproval letters stating how much a lender is willing to let you borrow. From here, select the one you want to go with and start shopping for a home!
Frequently Asked Questions
See if Your Credit Score Qualifies
While a lifetime of mortgage insurance payments is unpleasant, the numerous perks of an FHA loan may outweigh that drawback—and you may have the opportunity to refinance down the road. For homebuyers with minimal savings or credit that needs improvement, an FHA loan may be within reach when a conventional loan is not.
Make sure to check your FICO® ScoreΘ for free from Experian to see if you might be eligible for an FHA loan. If not, it's an indicator that it's the right time to start building or improving your credit.
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About the author
Emily Starbuck Gerson
Emily Starbuck Gerson is a freelance writer who specializes in personal finance, small business, LGBTQ and travel topics. She’s been a journalist for over a decade and has worked as a staff writer at CreditCards.com and NerdWallet. Emily’s work has appeared in CNBC, MarketWatch, Business Insider, USA Today, The Christian Science Monitor and the Chicago Tribute, among other websites and publications.
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