FHA loans can help you achieve homeownership if you don’t have a large down payment saved or your credit score is less than perfect. That said, they come with certain downsides that might not be worth it if you can afford or qualify for other loan options.
But what exactly is an FHA loan? And what makes them different from other loan options? In this guide, we’ll cover how it works, when it makes sense to apply for one, and the best strategies to use if you decide this mortgage is right for you.
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What is an FHA loan?
An FHA loan is a type of mortgage backed by the Federal Housing Administration (FHA) and offered by private mortgage lenders approved by the agency. Government insurance protects lenders in case borrowers default, so FHA loans often have more flexible requirements than conventional loans. This loan was designed with first-time home buyers in mind and helps low- and moderate-income families become homeowners.
How do FHA loans work?
FHA loans work like most mortgages. The only difference is that they’re insured by the federal government. It’s important to note that private lenders, including banks, credit unions, and online lenders, offer FHA loans—not the government. And because the government protects lenders in case of default, they often accept borrowers with lower credit scores and high debt-to-income (DTI) ratios.
However, borrowers must pay upfront and annual mortgage insurance premiums (MIP) to further offset the lender’s risk. It’s important to note the difference between MIP and private mortgage insurance (PMI). MIP often lasts for the life of the loan unless you refinance into a conventional mortgage. On the other hand, PMI is for conventional loans, and you can remove it once you reach 20% equity.
Regarding loan options, FHA loans are like conventional loans. You can choose a fixed- or an adjustable-rate mortgage and a loan term of 15 or 30 years.
FHA loan requirements
To qualify, you must meet several FHA loan requirements, including the following:
Credit score
FHA loans are available to borrowers with credit scores as low as 500. If your score ranges from 500 to 579, you may be eligible for an FHA loan, but you’ll need to put at least 10% down. If your score is 580 and above, you only need to put down 3.5%.
Debt-to-income ratio
Your DTI ratio is a factor lenders consider when evaluating your eligibility. Most lenders prefer a DTI ratio no more than 43%. However, you can get a mortgage with a high DTI ratio of up to 50%.
Down payment
The minimum down payment for an FHA loan is 3.5% if you have a credit score of 580 or higher. If your score ranges from 500 to 579, you’ll need to put down at least 10% of the home’s purchase price.
Loan limits
In 2025, you can borrow an FHA loan between $524,225 and $1,209,750, depending on your county. Visit HUD’s website to check the FHA loan limit in any county.[1]
Appraisal
The home you want to buy with an FHA loan must meet the minimum FHA requirements.[2] That’s why lenders will order an appraisal to ensure that the property is worth what you’re paying for. Keep in mind that an appraisal is different from a home inspection.
Mortgage insurance premium (MIP)
You’ll need to pay an upfront mortgage insurance premium at closing, typically 1.75% of the loan principal. After that, you’ll make monthly mortgage insurance premiums.
How long you pay the monthly premiums depends on the down payment you make. If you put less than 10% down, you’ll pay MIP for the life of the loan. But if you put down 10% or more, you’ll pay FHA mortgage insurance for 11 years.
Pro tip: Once you’ve built at least 20% equity, you can refinance into a conventional loan, which allows you to cancel mortgage insurance. However, you must meet specific qualifications.
Occupancy
You can only use an FHA loan to buy a primary residence with one to four units.
Pros and cons of FHA loans
Still not sure if an FHA loan is the right mortgage for you? Weighing the pros and cons can help you make an informed decision.
Pros
- Low credit score: Unlike conventional loans, where most lenders require a score of at least 620, you can qualify for an FHA loan with a score as low as 500.
- Low down payment: You only need to make a down payment of 3.5%, provided that your credit score is at least 580.
- Flexible debt-to-income ratios: You may be eligible for an FHA loan with a high DTI ratio if you meet specific compensating factors.
- FHA 203(k) option: Lets you roll renovation costs into the mortgage for fixer-uppers.
- Assumable mortgages: If you sell your home, the buyer may be able to take over your FHA loan.
Cons
- Mortgage insurance: You’ll have to pay MIP for the entire life of the loan.
- Primary residences only: You can’t use it to finance second homes or investment properties.
- Loan limits: You can’t borrow more than the conforming FHA limits for the area.
- Appraisal and property requirements:The property must undergo a separate appraisal to ensure it meets the FHA safety and livability standards.
Good strategies to use with an FHA loan
The lower down payment and credit score requirements may seem appealing, but the real advantage comes from knowing how to make the most of the program. Here are some smart strategies to use with an FHA loan:
Refinance later into a conventional loan
One of the biggest downsides of an FHA loan is the mortgage insurance, which you’ll pay over the life of the loan. However, once you’ve built up at least 20% equity in your home, you can refinance into a conventional loan. Doing so lets you avoid MIP entirely, which can save you hundreds of dollars each month.
Down payment assistance programs
While FHA loans require just 3.5% down with a credit score of 580 or higher, even that amount can be challenging for first-time home buyers to save. The good news is that there are several down payment assistance programs you can take advantage of.[3] This can help you buy a home with very little upfront cash, so be sure to check the available programs in your area.
Think long-term about the resale value
One of the lesser-known benefits of FHA loans is that they are assumable. This means that if you decide to sell your home, the buyer may be able to take over your FHA loan, including the interest rate. If mortgage rates rise in the future, this can be a huge selling point that sets your home apart in a competitive market.
When an FHA loan isn’t worth it
Although FHA loans can help many first-time buyers attain homeownership, they aren’t always the best option. Here’s when you may want to think twice before choosing this type of loan:
Higher long-term costs
Unlike conventional loans that let you remove PMI once you’ve built at least 20% equity, FHA’s MIP stays over the life of the loan if you put less than 10% down. That means even if you build considerable equity in your home, you’ll continue paying monthly insurance premiums unless you refinance.
Property restrictions
Another challenge is that FHA loans come with stricter appraisal and property standards. The FHA requires that homes meet basic safety and livability requirements, which means some properties won’t qualify.
Better options available
If you have a strong credit score and can afford a 20% down payment, a conventional mortgage is usually the smarter choice. You’ll not only avoid ongoing mortgage insurance, but you’ll also likely qualify for a lower interest rate. Even if you can’t save 20%, some conventional loans allow you to put down as little as 3% and then cancel PMI once you’ve built enough equity.
Next steps: Where can you get an FHA loan?
If you think an FHA loan is right for your needs, the next step is finding an FHA-approved lender. Banks, credit unions, and many online lenders offer them, but rates and terms can vary. Start by comparing lenders and using FHA loan calculators to estimate your true costs. You may also want to explore down payment assistance programs in your area to further reduce upfront costs.