FHA Loans

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). Because the government guarantees these loans, private lenders can offer them to borrowers with lower credit scores and smaller down payments than conventional financing typically allows.

FHA loans are not issued by the government directly — you still borrow from a bank, credit union, or mortgage company. The FHA insurance protects the lender if you default, which is why you pay a mortgage insurance premium (MIP) as part of the deal.

The program has been the foundation of first-time homeownership in America since 1934. FHA loan limits are set by county and change annually. In most areas the limit for a single-family home is $524,225 in 2025; in high-cost areas it can reach $1,209,750.

To qualify for an FHA loan, you generally need to meet these requirements:

• Credit score: 580 or higher for a 3.5% down payment. Scores between 500–579 may qualify with a 10% down payment, though many lenders require 580+.
• Employment and income: Steady employment history for the past two years. Self-employed borrowers need two years of tax returns showing stable income.
• Debt-to-income ratio: Generally 43% or below, though some lenders allow up to 50% with compensating factors like large cash reserves.
• Primary residence only: FHA loans must be used to purchase or refinance the home you plan to live in as your primary residence.
• Legal residency: You must be a U.S. citizen, lawful permanent resident, or eligible non-citizen with valid social security number.
• Wait periods after hardship: 2 years after bankruptcy discharge; 3 years after a foreclosure or short sale.

The FHA's down payment structure is one of the most accessible in the mortgage market:

• 3.5% down payment — available if your credit score is 580 or higher. On a $350,000 home, that's $12,250 out of pocket.
• 10% down payment — required if your credit score falls between 500 and 579.
• Gift funds permitted: The entire down payment can be gifted by a family member, employer, or charitable organization — no repayment required. A gift letter is needed.
• Down payment assistance: Many state and local programs offer grants or second mortgages that can cover the FHA down payment.

Keep in mind that most lenders add their own "overlays" — additional requirements above the FHA minimum. Some lenders won't approve scores below 620 even though FHA allows 580.

FHA mortgage insurance is mandatory and comes in two parts:

• Upfront Mortgage Insurance Premium (UFMIP): 1.75% of the loan amount, paid at closing or rolled into the loan. On a $350,000 loan that's $6,125.
• Annual MIP: 0.55% to 1.05% of the loan balance per year, paid monthly. The exact rate depends on your loan term, loan amount, and LTV ratio.
• Duration: If you put down less than 10%, annual MIP continues for the life of the loan. Put down 10% or more and MIP cancels after 11 years. This is a key contrast with conventional loans, where PMI drops off once you reach 20% equity.

Standard closing costs also apply: appraisal, title, origination fees, and prepaid items typically add 2–5% of the loan amount. FHA allows sellers to contribute up to 6% of the purchase price toward your closing costs.