• A Federal Housing Administration (FHA) loan is a government-insured mortgage that allows borrowers to buy a home with more lenient qualification requirements.
  • FHA loans are a popular mortgage loan option for homebuyers who may not qualify for conventional loans based on their credit score or financial profile. 
  • FHA loans offer down payments as low as 3.5% for well-qualified borrowers and can serve borrowers with credit scores as low as 600 (or possibly lower in some cases). 

Many Americans want to buy a home but have concerns about their ability to qualify for a mortgage. Are you worried that your credit score might prevent you from getting a home loan? Or that you won't be able to save up enough for a down payment, which can be as high as 20% for some loan types? An FHA loan might be your solution. Since 1934, the Federal Housing Administration (FHA) has been working to make homeownership more accessible through the FHA loan program.[1]

In this article, you’ll learn all about FHA loans, including:

  • What an FHA loan is and how it works, 
  • The benefits and potential drawbacks of an FHA loan, 
  • How to qualify for an FHA loan, 
  • How to get an FHA loan.

What Is an FHA Loan? 

An FHA loan is a government-backed mortgage with less rigorous financial requirements for homebuyers than conventional loans. Through an FHA loan, buyers can potentially qualify for a home loan with a lower credit score and a lower down payment than what would normally be required for other loan types (like a conventional loan).[2]

“Government-backed” means that the federal government insures the loan. This insurance protects the lender in case the borrower defaults on the loan. So, government-backed loans are less risky for lenders, which allows them to relax their qualification criteria and extend loans to those who might not qualify for a conventional loan.  

How Do FHA Loans Work? 

FHA loans work similarly to any of the other five main types of mortgage loans; you borrow a lump sum from a lender to purchase a home, then repay that loan balance, plus interest, over the loan term. 

FHA loans allow homebuyers to borrow up to 96.5% of a home’s value (known as the loan-to-value (LTV) ratio).[2] This means you could potentially buy a home with a down payment of as little as 3.5% through an FHA loan. Additionally, you could apply for down payment assistance programs to further reduce the down payment amount required.  

However, not all borrowers who qualify for an FHA loan will qualify for this extremely low downpayment option. Depending on multiple factors, such as credit scores, annual income, and current debts, some qualified FHA borrowers may be required to put more money down. 

It is important to note that all FHA loans require mortgage insurance.[2] Mortgage insurance is an additional insurance policy, paid for by the homebuyer, that protects the lender against default. For FHA loans, this mortgage insurance is called MIP, which stands for Mortgage Insurance Premium. In many cases, this insurance is automatically provided, and the cost is rolled into the mortgage payment. This means you don't have to shop for this insurance or make a separate payment. 

Are FHA Loans for Low-Income Households?

Not necessarily. There is no income restriction, so FHA loans are open to buyers of any income range, so long as you make enough money to cover the mortgage payments (including property taxes and insurance) along with your other debt repayments. There are, however, loan amount restrictions. So FHA loans aren’t used to buy exceedingly high-value properties.

Are FHA Loans for First-Time Buyers?

While FHA loans are often suitable for first-time homebuyers, you do not have to be a first-time buyer to qualify.

What Are the Advantages of FHA Loans? 

Many buyers choose FHA loans because of the benefits they offer, including:[3]

  • Lower credit score requirements. If your credit score is too low to qualify for a conventional loan, you might still qualify for an FHA loan. It may even be possible to qualify for an FHA loan with a bankruptcy, foreclosure, or other serious mark on your financial record. 
  • Lower down payment requirements. You might need only 3.5%-10% down to buy a home with an FHA loan.
  • Option to finance closing costs and/or accept seller concessions. Closing costs are the fees you pay to close your real estate transaction. FHA closing costs could potentially be rolled into the loan, allowing you to pay less out-of-pocket to complete the home purchase. Motivated home sellers may also be willing to help cover your closing costs; with an FHA loan, sellers can pay up to 6% of the purchase price in buyer's closing cost assistance.

Are There Potential Downsides to FHA Loans? 

There are a few potential downsides to consider before applying for a home loan:

  • Your buying options may be slightly limited. There are limits to how much you can borrow through an FHA loan, so high-priced homes might not be realistic candidates.[4] Additionally, FHA loans can only be used to purchase a “primary residence” (the home you will live in), so they are not available for investment properties. Interestingly, you can use an FHA home loan to purchase a property with up to four units as long as you will be living in one of the units.[3] Opting for a small multi-family property allows you to rent out the other units to help cover the mortgage expenses.
  • Mortgage insurance is required. Mortgage insurance premiums add to your monthly housing expenses. However, mortgage insurance is not unique to FHA loans. Mortgage insurance of some type is required for any home purchase with a down payment of less than 20% (except for U.S. Department of Veterans Affairs (VA) loans, which are reserved for military service members, veterans, and their spouses, but come with their own VA funding fees[5]). It is worth noting that, for FHA loans with a down payment of 10% or more, mortgage insurance can be cancelled after 11 years. FHA loans with a down payment under 10% must retain mortgage insurance for the life of the loan. However, you may be able to eliminate mortgage insurance earlier by refinancing the loan.  

What Are The Requirements For An FHA Loan?

FHA loan requirements are as follows:[6]

  • Steady, verifiable income. Be prepared to provide pay stubs, bank account statements, and/or tax returns to confirm your income. As a general guideline, your income should be high enough that all your monthly debt payments, including the new mortgage, equal less than 45% of your monthly income. This is called a debt-to-income ratio (DTI).
  • A qualifying credit score. While 500 is the minimum score allowed by the FHA program, many individual lenders require scores of at least 600.
  • The loan amount cannot exceed the loan maximum. The loan maximums are applied locally, with higher limits in higher-value markets. 
  • The property must serve as a primary residence. You cannot use an FHA loan to buy a second home, vacation home, or investment property that you do not live in full-time.
  • The home must be inspected and appraised. Because FHA loans are backed by the government, they have stricter property requirements than conventional loans to ensure the home is safe, livable, and structurally sound. An appraisal must be performed by a HUD-approved appraiser. This appraisal not only assesses the home’s value but also checks for issues like peeling paint, faulty electrical wiring, or roof damage that could pose health or safety risks. If the home doesn’t meet FHA standards, repairs must be made before the loan can be approved.
  • You must move in within 60 days of closing. You need to be able to physically occupy the house within 60 days following the day you close on the home and officially become the owner. 

FHA Loans vs. Conventional Loans

FHA loans allow borrowers with lower credit scores to qualify for down payments as low as 3.5%, making them more accessible than conventional loans, particularly for first-time buyers. However, they require upfront and annual mortgage insurance premiums regardless of the down payment amount, which can add to the total cost of ownership over time.

Conventional loans, on the other hand, are not backed by the government and generally have stricter qualification criteria. Borrowers typically need a credit score of at least 620. Conventional loan interest rates may be slightly higher than FHA rates. However, this expense could be offset by the lack of MIP. While conventional loans can carry private mortgage insurance (PMI), this can typically be avoided by making a down payment of at least 20%.

Conventional loans may work well for: well-qualified buyers, especially those who can put down 20% or more. They also allow for larger loan amounts, particularly in high-cost markets, and can be used to purchase residential properties to be rented out or lived in only part-time. 

FHA loans may work well for: first-time homebuyers who have limited savings for a down payment, as well as borrowers with lower credit scores who may not qualify for conventional financing.

  FHA Loan Conventional Loan
Down Payment At least 3.5% At least 3%
DTI Ratio (Front End) Up to 31% in most cases Up to 28% in most cases
Mortgage Insurance Mortgage insurance premium (MIP) required Private mortgage insurance (PMI) typically required if the down payment is less than 20%
Interest Rates May have a lower base rate May have a higher base rate, but no MIP
Loan Limits Lower limits Higher limits (especially in high-cost areas)
Minimum Credit Score 580-600 (varies by lender), scores as low as 500 may be considered with a higher down payment 600-620 (varies by lender)
Inspection and Appraisal Requirements Require an appraisal with a physical inspection by a an FHA-approved appraiser to make sure the property meet HUD's minimum property standards. Typically require an appraisal to confirm the value of the property. Inspections are not typically required but are generally advisable.
Refinancing Options Rate and term, cash-out, and FHA Streamline Rate and term and cash-out
Ideal For First-time buyers and those with lower credit Borrowers with stronger credit scores and/or higher income and savings

Different Types of FHA Loans

FHA loans come in different forms, each designed to meet a different need for borrowers. Whether you're buying a home or refinancing an existing mortgage, consider the following FHA options:

  • FHA Purchase Loan. This is the most common type of FHA loan, used to buy a primary residence (this is the form of FHA loans discussed throughout this article).
  • FHA Rate-and-Term Refinance. This option lets current homeowners refinance their existing mortgage, whether it be FHA or conventional, into a new FHA loan, typically to get a lower interest rate or better loan terms. It's ideal for adjusting monthly payments without cashing out any of your home equity.
  • FHA Cash-Out Refinance. Homeowners with equity in their property can use this loan to refinance while also withdrawing cash for things like home improvements, debt consolidation, or other large expenses. You'll need a higher credit score and more equity than with other FHA products to qualify for a cash-out refinance.
  • FHA Streamline Refinance. This is a fast, simplified option for borrowers who already have an FHA loan and want to refinance. It requires minimal documentation, which results in lower closing costs. However, streamline refis don’t offer a cash-out option. 

Other Affordable Options for Homebuying

While FHA loans are a popular choice for budget-conscious homebuyers, they are not the only option. Here are a few additional strategies to help make homeownership more accessible:

  • VA Loans. VA loans are government-backed loans reserved for active military service members, veterans, and their spouses. VA loans offer down payments as low as 0% for qualified borrowers. 
  • USDA Loans. USDA loans are issued or backed by the Department of Agriculture to promote residence in areas with lower population density. These loans only apply to homes in eligible rural areas, but they can offer down payments as low as 0% for qualified buyers of qualified properties.   
  • Down Payment Assistance (DPA) Programs. Regardless of the loan type you choose (FHA loan or otherwise), DPA programs can provide financial assistance through grants and favorable loan terms to make homebuying more affordable. 

FHA Loan FAQs

What Is the Interest Rate on an FHA Loan?

Interest rates on FHA loans fluctuate with the market.[7] You can check current rates online.

Do FHA Loans Offer Lower Interest Rates than Conventional Loans?

FHA loans can offer lower interest rates than conventional loans, but that’s not always the case. This depends on several factors, including your credit score, your debt-to-income ratio, and your lender. 

Can Self-Employed Workers Qualify for an FHA Loan?

Yes, as long as you meet the requirements. You would need to prove that your self-employment income is high enough to cover your existing debts plus the new mortgage. The net income on your annual tax returns could serve as proof of income.

What Is The Maximum Loan Term On An FHA Loan?

An FHA loan's maximum allowable loan term is 30 years.[7]

How Much Is the MIP on an FHA Loan?

There is an upfront fee and an annual fee for mortgage insurance premiums.[8] The upfront MIP expense is 1.75% of the loan amount (although this upfront amount can be rolled into the loan and repaid over time). The annual MIP expense may be between .15% and .75% of the loan balance, depending on how long the loan term is, the size of the loan balance, and how much of the property’s value is financed.

Can FHA Loans Be Refinanced?

Yes. FHA loans are eligible for traditional refinancing. There is even a streamlined FHA refinance program available to speed up the process for qualified FHA mortgages.[9] Refinancing your mortgage can be a useful way to reduce your mortgage payment or borrow against the value of your home in the future.  

How Do I Apply for an FHA Loan?

You can apply for an FHA loan with any FHA-approved lender. Many lenders even allow you to apply for an FHA loan online. You’ll simply answer some questions about your identity, employment, and finances, then upload relevant financial documents. 

Once your application is submitted, the lender can review it to see if you qualify for a loan and, if so, to determine what loan terms they can offer you. 

The Bottom Line

FHA loans are a useful mortgage type, particularly for first-time buyers and buyers who could benefit from the relaxed credit score criteria and low down payment requirement.

You can learn more about getting a home loan and explore your options to find the right fit for your next home purchase or refinance.