FHA loans are mortgages that help many low- and moderate-income families by offering more lenient credit and down payment requirements than conventional loans. FHA loans are insured by the federal government to help first-time home buyers, especially low- and moderate-income families, achieve the dream of homeownership.
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How do FHA loans work?
Just because the government insures FHA loans doesn’t mean it offers them. Private lenders, such as banks, credit unions, and online lenders, offer such loans, but they must be approved by the Federal Housing Administration (FHA).
FHA loans work much like conventional mortgages. The key difference is that the FHA insures the loan. This means if you default on your payments, the FHA covers a portion of the lender’s loss. Because of this safety net, most lenders are willing to approve borrowers who may not qualify for conventional loans. There are also different types of FHA loans, such as FHA construction loans.
FHA loan requirements
You must meet certain FHA loan requirements to qualify, though they’re more flexible than conventional loans.
- Down payment: You can put down as little as 3.5% provided that your credit score is 580 or higher. For scores between 500 and 579, you’ll need to make a 10% down payment.
- Credit score: You can qualify for an FHA loan with a credit score as low as 500, but you must meet certain conditions, like putting 10% down.
- Debt-to-income (DTI) ratio: Most lenders prefer a DTI ratio of 43% or less. However, some lenders accept high DTI ratios of up to 50%.
- Mortgage insurance: You must pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount at closing, which can be rolled into the mortgage. Then, you’ll continue making monthly MIP for the life of the loan. You can calculate these costs using a mortgage insurance calculator.
- Loan limits: FHA loan limits vary by county. In 2025, you can borrow between $524,225 and $1,209,750 for a single-family home, depending on your location. To look up the FHA loan limit in any county, visit HUD’s website.
- Appraisal: The property must meet the minimum FHA safety and livability standards.
- Occupancy: FHA loans can only finance primary residences.
In addition to these requirements, you must also provide proof of steady income and your employment history.
Pros and cons of FHA loans
Pros
- Low minimum credit score: You can qualify with a credit score as low as 580 if you’re putting 3.5% down or even 500 if you can manage a 10% down payment.
- Low down payment: You only need to put down 3.5% as long as you meet the minimum credit score requirement.
- Flexible debt-to-income ratios: You can qualify even with a high DTI ratio of 50%, but you must meet certain compensating factors.
- Assumable mortgage: FHA loans are assumable, meaning future buyers can take over your loan plus the interest when you sell your home. If mortgage rates rise, this will be a huge selling point.
Cons
- Lifetime mortgage insurance: The biggest disadvantage of FHA loans is the mortgage insurance premium. Unlike private mortgage insurance (PMI) on conventional loans, which you can remove once you’ve built 20% equity, MIP on FHA loans usually lasts for the loan’s life if you put less than 10% down.
- Property restrictions and stricter appraisals: Not all properties qualify for an FHA loan. The house you’re looking to buy must meet the FHA’s minimum safety and livability standards.
- Loan limits: You can’t borrow more than the loan limits set by the FHA.
How to be smart with an FHA loan
The real value in an FHA loan comes from knowing how to use it strategically so you’re not stuck paying more than you need to in the long run. Here are some of the best ways to get the most out of an FHA loan:
Refinance into a conventional loan later.
With an FHA loan, you’ll pay mortgage insurance for the life of the loan unless you refinance it. A smart move is to treat the FHA loan as a stepping stone. Once you’ve built at least 20% equity in your home, refinance into a conventional mortgage. This removes the ongoing MIP, and you may also get a lower interest rate. Learn more about FHA loans versus conventional loans.
Pair with down payment assistance.
Even though FHA loans only require a 3.5% down payment, saving this amount can still be difficult for many people. But with several down payment assistance programs, you can significantly reduce your out-of-pocket costs and buy a home sooner.[1] Check the available programs in your region and take advantage of them.
Use gift funds or a cosigner.
The FHA allows you to use gift funds from friends and family to cover your down payment and closing costs. If you have a poor financial profile, you can also add a cosigner to your application to reduce your borrowing risk in the eyes of lenders.
Consider FHA 203(k) loans for fixer-uppers.
If move-in-ready homes in your area are out of your budget, consider getting a fixer-upper. An FHA 203(k) loan can help you finance the purchase of the home and renovation costs by combining them into one mortgage. It’s a smart way to buy a less expensive property and build equity quickly through improvements. However, you’ll need to work with a licensed contractor, and the work must meet FHA standards.
Think long-term about resale value.
Another benefit of FHA loans is that they’re assumable, meaning if you ever decide to sell your house, the buyer can take over your FHA loan—plus the interest rate. If the housing market has higher mortgage rates then, your home will be more attractive to buyers.
Is an FHA loan right for you?
An FHA loan can be the right financing option if you have less-than-perfect credit, don’t have a large down payment saved, or want flexible DTI ratios. It’s often the fastest path to homeownership for first‑time buyers, especially when paired with down payment assistance programs.
However, it’s not for everyone. The lifetime cost of MIP and stricter property standards mean you’ll want to weigh your options carefully. If you qualify for a conventional loan, you could save more in the long run. Otherwise, think of an FHA loan as a stepping stone that can help you buy now and potentially refinance later into a more cost‑effective mortgage.