FHA Loans Explained: Requirements, Costs, and When They Make Sense

What an FHA loan actually is

The Federal Housing Administration does not lend money. It insures loans made by approved private lenders, absorbing the loss if a borrower defaults. That insurance is why lenders accept lower credit scores and smaller down payments than they would otherwise, and it is paid for by the borrower through mortgage insurance premiums.

The program exists to widen access to homeownership for buyers who cannot clear conventional underwriting. It has done that for close to ninety years. It also costs more over time than conventional financing for borrowers who could qualify either way, which is the central tradeoff.

Requirements and limits

The headline numbers: 3.5% down with a FICO of 580 or above, 10% down between 500 and 579. Most lenders apply overlays and will not go below 620 regardless of program minimums. Debt-to-income can stretch past 50% with compensating factors, which is meaningfully more permissive than conventional underwriting.

FHA loan limits are set county by county and adjust annually, with a floor for low-cost areas and a substantially higher ceiling in high-cost metros. Check the current limit for your county before assuming a property qualifies. The property must also be owner-occupied — FHA is not an investor program, though house hacking a two- to four-unit building you live in is explicitly allowed.

The mortgage insurance math

Two premiums apply. The upfront mortgage insurance premium is 1.75% of the loan amount, almost always financed into the balance. The annual premium is charged monthly and varies with loan term, loan-to-value, and loan size.

The critical rule: if you put down less than 10%, the annual premium remains for the full loan term. It does not fall off at 78% loan-to-value the way conventional PMI does. The only exit is refinancing into a conventional loan once you have 20% equity, which means you are betting on rates being tolerable when you get there. Model both scenarios in our mortgage calculator.

Property standards and seller resistance

FHA appraisers evaluate value and also check minimum property standards — peeling paint on pre-1978 homes, missing handrails, roof life under two years, inoperable systems, exposed wiring. Anything flagged must be corrected before closing, usually at the seller's expense.

This is why some listing agents advise sellers to prefer conventional offers. On a well-maintained home it rarely matters. On a fixer, an FHA offer can be a genuine obstacle, and FHA 203(k) renovation financing is the tool designed for that situation.

Frequently asked questions