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Part of the Series Federal Housing Administration (FHA) LoansUnderstanding FHA Loans
CURRENT ARTICLERules for FHA Loans
A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than the best mortgage lenders usually require. FHA loans are designed to help low- to moderate-income families attain homeownership, and they are particularly popular with first-time homebuyers.
If you have a credit score of at least 580, you can borrow up to 96.5% of the value of a home with an FHA loan. That means the required down payment is only 3.5%.
If your credit score falls between 500 and 579, you can still get an FHA loan, but you will need to make a down payment of at least 10%.
With FHA loans, the down payment can come from savings, a financial gift from a family member, or a grant for down payment assistance.
The FHA doesn't actually lend anyone money to buy a home. Instead, the loan is issued by a bank or other financial institution that is approved by the FHA.
What the FHA does is guarantee the loan. That makes it easier to get bank approval since the bank isn't bearing the default risk. Some people refer to it as an FHA-insured loan for that reason.
Borrowers who qualify for an FHA loan are required to purchase mortgage insurance, with the premium payments going to the FHA.
Congress created the FHA in 1934 during the Great Depression. At that time, the housing industry was in trouble: Default and foreclosure rates had skyrocketed, 50% down payments were commonly required, and the mortgage terms were impossible for ordinary wage earners to meet. As a result, the U.S. was primarily a nation of renters, and only one in 10 households owned their homes.
After the government created the FHA to reduce the risk to lenders and make it easier for borrowers to qualify for home loans, the homeownership rate in the U.S. steadily climbed, reaching an all-time high of 69.2% in 2004, according to research from the Federal Reserve Bank of St. Louis. In mid-2024, the rate stood at 65.6%.
Though principally designed for lower-income borrowers, FHA loans are available to everyone, including those who can afford conventional mortgages. In general, borrowers with good credit and strong financials will be better off with a conventional mortgage, while those with poorer credit and more debt, as well as would-be homebuyers who simply don't have the cash for a larger down payment, can benefit from an FHA loan .
In addition to traditional mortgages, the FHA offers several other home loan types.
This is a reverse mortgage program that helps homeowners age 62 and older convert the equity in their homes to cash while retaining the home's title. The homeowner can take the funds as a lump sum, in a fixed monthly amount, in a line of credit, or in some combination.
This loan factors the cost of certain repairs and renovations into the amount borrowed. It's helpful for those willing to buy a fixer-upper and put some sweat equity into their home.
This program is similar to the FHA 203(k) improvement loan program, but it's focused on upgrades that can lower your utility bills, such as new insulation or solar or wind energy systems.
This program works for borrowers who expect their incomes to increase. The Graduated Payment Mortgage (GPM) starts with lower monthly payments that increase over time. The Growing Equity Mortgage (GEM) has scheduled increases in monthly principal payments. Both promise shorter loan terms.
| 5 Types of FHA Loan | |
|---|---|
| FHA LOAN TYPE | WHAT IT IS |
| Traditional Mortgage | A mortgage that finances a primary residence. |
| Home Equity Conversion Mortgage | A reverse mortgage that allows homeowners age 62 and up to exchange home equity for cash. |
| 203(k) Mortgage Program | A mortgage that includes extra funds to cover the cost of repairs, renovations, and home improvements. |
| Energy Efficient Mortgage Program | A mortgage that includes extra funds to pay for energy-efficient home improvements. |
| Section 245(a) Loans | A Graduated Payment Mortgage (GPM) has a low initial monthly payment that increases over time. A Growing Equity Mortgage (GEM) has scheduled increases in monthly principal payments to shorten the loan term and build equity faster. |
Your lender will evaluate your qualifications for an FHA loan as it would with any mortgage applicant, starting with a check to see that you have a valid Social Security number, reside lawfully in the U.S., and are of legal age (according to your state's laws).
FHA loan criteria are less rigid in some ways than a bank's usual loan criteria. However, there are also some more stringent requirements.
Whether or not it's an FHA-guaranteed loan, your financial history will be examined when you apply for a mortgage.
FHA loans are available to individuals with credit scores as low as 500. That is within the "poor" range for a FICO score.
If your credit score is between 500 and 579, you may be able to secure an FHA loan, assuming you can afford a down payment of at least 10%. If your credit score is 580 or higher, you can get an FHA loan with a down payment of as little as 3.5%.
By comparison, applicants typically need a credit score of at least 620 in order to qualify for a conventional mortgage. The down payment required by most banks varies between 3% and 20%, depending on how eager they are to lend money at the time you apply.
As a general rule, the lower your credit score and down payment, the higher the interest rate you'll pay on your mortgage.
A lender will look at your work history as well as your last two years of payment history on your credit report.
People who fall behind on federal student loan payments or income tax payments will be rejected unless they agree to a satisfactory repayment plan for those debts. A history of bankruptcy or foreclosure may prove problematic, too.
Typically, to qualify for an FHA loan—or any type of mortgage—at least two years must have passed since the borrower experienced bankruptcy or foreclosure, and they must have established good credit and got their financial affairs in order since then. However, exceptions can be made if the borrower has experienced extenuating circumstances, such as serious illness.
Mortgages must be repaid, and the FHA-approved lender will want assurances that the applicant can achieve this. A key to determining if the borrower can make good on their commitment is evidence of recent and steady employment. This can be documented by tax returns and pay stubs.
If you've been self-employed for less than two years but more than one year, you may still qualify if you have a solid work and income history in the same or a related occupation for the two years before becoming self-employed.
Your mortgage payments, property taxes, mortgage insurance and homeowners insurance premiums, and any homeowner association fees must generally total less than 31% of your gross income. Banks call this the front-end ratio.
Meanwhile, your back-end ratio, which consists of your mortgage payment and all other monthly consumer debts, should be less than 43% of your gross income.
| FHA Loans vs. Conventional Loans | ||
|---|---|---|
| FHA LOAN | CONVENTIONAL LOAN | |
| Minimum Credit Score | 500 | Typically 620; can vary by lender |
| Minimum Down Payment | 3.5% with a credit score of 580+ and 10% for a credit score of 500 to 579 | 3% to 20% |
| Loan Terms | 15 to 30 years | 8 to 30 years |
| Mortgage Insurance Requirements | Upfront MIP + annual MIP for either 11 years or the life of the loan, depending on LTV and length of the loan | None with a down payment of at least 20% or after the loan is paid down to 78% LTV |
| Mortgage Insurance Premiums | Upfront: 1.75% of the loan + annual: 0.15% to 0.75%, paid monthly | PMI: 0.2% to 2% of the loan amount per year |
| Down Payment Gifts | 100% of the down payment can be a gift | Some or all of the down payment can be a gift depending on the lender |
| Down Payment Assistance Programs | Yes | No |
An FHA loan requires that you pay two types of mortgage insurance premiums (MIPs)—an upfront MIP and an annual MIP, which is paid monthly. The upfront MIP is equal to 1.75% of the base loan amount.
For example, if you're issued a home loan for $350,000, you'll pay an upfront MIP of 1.75% x $350,000 = $6,125. You can either pay the upfront MIP at the time of closing, or it can be rolled into the loan.
These payments are deposited into an escrow account that the U.S. Treasury Department manages. If you end up defaulting on your loan, the funds will go toward the mortgage repayment.
After the initial, one-time payment, borrowers make MIP payments every month. Those payments can range from 0.15% to 0.75% annually of the loan amount. Rates differ depending on the loan amount, the length of the loan, and the home's loan-to-value (LTV) ratio.
Let's say you have an annual MIP of 0.55%. In that case, a $350,000 loan would result in annual MIP payments of 0.55% x $350,000 = $1,925 (or $160.42 monthly). These monthly premiums are paid in addition to the one-time upfront MIP payment. You will make have to make annual MIP payments for either 11 years or the life of the loan, depending on the length of the loan and the LTV.
While you can no longer take a tax deduction for the amount you pay in premiums, you can still deduct mortgage interest, though, if you itemize your deductions rather than taking the standard deduction on your taxes.
| How Long You Will Pay the Annual Mortgage Insurance Premium (MIP) | |
|---|---|
| LTV% | HOW LONG YOU PAY THE ANNUAL MIP |
| ≤ 90% | 11 years |
| > 90% | Entire loan term |
Usually, the property you want to finance must become your principal residence and must be owner-occupied. In other words, the FHA loan program is not intended for investment or rental properties.
Detached and semi-detached houses, townhouses, row houses, and condominiums within FHA-approved condo projects are all eligible for FHA financing.
Also, you will need a property appraisal from an FHA-approved appraiser, and the home must meet certain minimum standards. Homes that are in such disrepair that they do not meet the FHA's requirements are deemed uninsurable. If the home doesn't meet these standards and the seller won't agree to make the required repairs, you must pay for the repairs at closing. (In this case, the funds are held in escrow until the repairs are made.)
FHA loans have limits on how much you can borrow. These are set by region, with lower-cost areas having a lower limit and high-cost areas having a higher one.
For 2024, the limits range from $498,257 to $1,149,825, which the FHA refers to as its "floor" and its "ceiling." There are "special exception" regions—including Alaska, Hawaii, Guam, and the U.S. Virgin Islands—where very high construction costs make the limits even higher.
Elsewhere, the limit is set at 115% of the median home price for the county, as determined by the U.S. Department of Housing and Urban Development (HUD).
The chart below lists the 2024 loan limits:
| 2024 FHA Loan Limits | |||
|---|---|---|---|
| PROPERTY TYPE | LOW-COST AREA LIMIT | HIGH-COST AREA LIMIT | SPECIAL EXCEPTION AREAS LIMITS |
| One-Unit | $498,257 | $1,149,825 | $1,724,775 |
| Two-Unit | $637,950 | $1,472,250 | $2,208,375 |
| Three-Unit | $771,125 | $1,779,525 | $2,669,275 |
| Four-Unit | $958,350 | $2,211,600 | $3,317,400 |
When you get an FHA loan, you may be eligible for loan relief if you experience a legitimate financial hardship, such as a loss of income or a large increase in living expenses. For example, the FHA has several forbearance plans that can allow you to pause or reduce your mortgage payments for a period of time.
Another program, the FHA Home Affordable Modification Program (HAMP), permanently lowered monthly mortgage payments to an affordable level. However, the program has been "temporarily suspended" through April 30, 2025.
FHA loans are often the best source of a mortgage for borrowers who are unable to obtain financing through private lenders. They may qualify for an FHA loan with a lower credit score and/or greater amounts of debt (and a higher debt-to-income ratio).
However, because FHA borrowers are often riskier, FHA loans usually come with somewhat higher interest rates and require borrowers to pay mortgage insurance premiums both upfront and monthly. FHA loans can only be used for your primary residence and come with borrowing limits.
You apply for an FHA loan directly with a bank or other lender that you choose. Most banks and mortgage lenders are approved for FHA loans.
If you apply for pre-approval of an FHA loan, the lender will gather enough financial information to issue (or deny) a pre-approval within a day or so. That will give you an idea of how much you can borrow while not committing yourself to anything.
All of the above is true for any mortgage application. If you want an FHA loan you should say that upfront.
That depends on where you plan to buy as well as on your ability to repay the loan.
The maximum amount anyone can borrow from the FHA varies by region.
In 2024, loan limits for a single-family home, for example, range from $498,257 in low-cost areas to $1,149,825 in high-cost areas. Alaska, Hawaii, Guam, and the U.S. Virgin Islands have special higher limits.
FHA loans include both an upfront premium, which can be rolled into the mortgage, and an annual premium paid monthly:
To estimate the costs, you can plug the numbers into an FHA loan calculator, several of which are available online. For example, a 30-year FHA loan at an interest rate of 7.125% on a home priced at $400,000 will have a $2,646 monthly loan payment plus a $176 monthly mortgage insurance payment.
In most cases, FHA mortgage insurance payments continue for either 11 years or the entire life of the loan.
The only way to end them earlier is to refinance the mortgage with a non-FHA loan. Your FHA loan will then be paid off in full. Assuming you have at least 20% equity in the home, you should no longer be required to have private mortgage insurance (PMI), either.
Yes, FHA-approved lenders may offer several refinancing options, including FHA streamline refinance loans and FHA cash-out refinance loans.
FHA loans usually come with higher interest rates than conventional mortgages and require borrowers to purchase mortgage insurance. FHA loans also have strict limits on the amount you can borrow.
The FHA loan is a path to homeownership for people that banks might reject otherwise because they have a less-than-stellar credit score or little cash available for a down payment. However, borrowers who can afford a substantial down payment may be better off going with a conventional mortgage from one of the best lenders. That way they can avoid the FHA loan's monthly mortgage insurance payments and get a lower interest rate on the loan.
Article SourcesUnderstanding FHA Loans
CURRENT ARTICLERules for FHA Loans
Up-front mortgage insurance (UFMI) is a type of mortgage insurance policy made at the time of the loan. It is required on certain FHA loans.
A reverse mortgage initial principal limit is the amount of money a reverse mortgage borrower can receive from the loan.
A workout agreement renegotiates the terms of a loan to provide a measure of relief to the borrower.The Rural Housing Service (RHS) is a division of the USDA that manages loan programs focusing on rural housing and community service facilities.
A principal reduction is a decrease in the principal owed on a loan, typically a mortgage, as an alternative to foreclosure on the home.
Cross collateralization is the act of using one asset as collateral to secure multiple loans or multiple assets to secure one loan.
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