What Is an FHA Loan?
An FHA loan is a government-insured mortgage backed by the Federal Housing Administration — a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to make homeownership more accessible, particularly for borrowers with lower credit scores or smaller down payments.
The FHA insures the loan — meaning if you default, the FHA reimburses the lender. This government backing allows lenders to offer more flexible qualifying standards than conventional loans.
FHA loans are popular with first-time buyers, borrowers rebuilding credit, and those with limited savings for a down payment. They are available to all eligible borrowers — not just first-time buyers.
Requirements at a Glance
These are the baseline FHA guidelines. Individual lenders may impose additional overlays — always confirm specifics with a licensed loan officer.
Down Payment & Credit Score Tiers
FHA ties the minimum down payment directly to your credit score. There are two tiers — here's how they work.
- ◆Minimum credit score of 580 required
- ◆3.5% down payment of the purchase price
- ◆Down payment can come entirely from gift funds
- ◆MIP required for the life of the loan
- ◆Most common FHA scenario
- ◆Credit scores from 500 to 579 are eligible
- ◆10% down payment required
- ◆Down payment can come from gift funds
- ◆MIP still required for the life of the loan
- ◆Many lenders impose overlays above the 500 FHA floor
MIP — Mortgage Insurance Premium
FHA requires two types of mortgage insurance: an upfront premium paid at closing and an annual premium paid monthly. Both protect the lender — not you — in case of default.
Of the base loan amount, due at closing. Almost always financed into the loan balance.
Annual rate of loan amount, divided and paid monthly. Varies by loan term, LTV, and loan amount.
For loans with less than 10% down, MIP continues for the entire loan term — it does not cancel automatically.
Benefits & Trade-Offs
- Lower credit score requirements than conventional — as low as 500
- Low 3.5% down payment with a 580+ credit score
- Higher DTI allowances — up to 56.99% total DTI
- Gift funds accepted for entire down payment and closing costs
- Streamline refinance available for existing FHA borrowers
- MIP required for the life of the loan in most cases — does not cancel automatically
- Loan limits vary by county and may be lower than conventional limits
- Property must meet FHA safety and structural standards
- Primary residence only for purchase transactions — no second homes or investment properties
FHA vs. Other Programs
See how FHA stacks up against the other major loan programs across the factors that matter most.
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Min. Down Payment | 3%–5% | 3.5% (580+) · 10% (500–579) | 0% | 0% |
| Min. Credit Score | 620 | 500–580 | No VA min.* | 640* |
| Mortgage Insurance | PMI — cancels at 78% LTV | MIP — life of loan* | None | Low guarantee fee |
| Max DTI | ~50% | ~56.99% | No fixed cap* | 41%* |
| Property Types | Primary, second, investment | Primary only (purchase) | Primary only | Primary only (rural) |
| Income Limits | None | None | None | ≤ 115% AMI |
| Eligibility | US Citizens, Permanent Residents, Non-Permanent Residents |
US Citizens, Permanent Residents |
Military only | Location + income |
* Most lenders impose their own minimums above program floors. Consult a licensed loan officer for specifics. · * FHA MIP for life of loan applies to down payments less than 10%.
Key Takeaways
- FHA loans are government-insured and offer flexible qualification standards — lower credit scores and higher DTI allowances than conventional.
- A 3.5% down payment is available with a credit score of 580 or higher. Scores between 500–579 require 10% down.
- Mortgage insurance is mandatory on all FHA loans — an upfront premium of 1.75% plus an annual premium paid monthly.
- MIP does not cancel automatically at 20% equity. For loans with less than 10% down, it remains for the life of the loan.
- FHA loans are popular with first-time buyers but are available to all eligible borrowers — there is no first-time buyer requirement.
- FHA loans are for primary residences on purchase transactions only — second homes and investment properties are not eligible.