What Makes FHA Loans Different
FHA (Federal Housing Administration) loans are government-insured mortgages that allow lenders to offer lower down payment and credit score requirements than conventional loans. The FHA does not lend money directly — it insures private lenders against borrower default, allowing those lenders to accept applications that would not meet conventional standards. In exchange for this insurance, borrowers pay Mortgage Insurance Premiums (MIP).
The primary advantages of FHA: 3.5% minimum down payment (versus 5-20% for conventional), minimum 580 credit score for full qualification (versus typically 620+ for conventional), and more flexible DTI (debt-to-income) standards. The primary disadvantage: mandatory MIP — both an upfront premium (1.75% of loan amount at closing) and an annual premium (0.55-1.05% of loan balance per year), which persists for the life of the loan if down payment is below 10%.
The FHA-versus-conventional decision reduces to comparing the total cost of MIP against the benefit of lower down payment or qualification flexibility. For buyers who can qualify for both, conventional with PMI (which cancels at 20% equity) is often less expensive long-run than FHA with lifetime MIP. For buyers who cannot qualify for conventional, FHA is the path to homeownership.
Check your FHA loan eligibility
Enter your credit score, income, debts, and target purchase price to see whether you qualify and estimate your FHA payment including MIP.
Check My FHA EligibilityFHA Loan Requirements Checklist
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Credit score requirement
Minimum 580 credit score for 3.5% down payment qualification. Scores between 500-579 require 10% down. Most FHA lenders in practice apply overlays (stricter standards) requiring 620+ for competitive rates. If your score is 580-619, expect fewer lender options and potentially higher rates. Check your credit report at annualcreditreport.com and dispute any errors before applying.
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Down payment requirement
Minimum 3.5% of the purchase price with a 580+ credit score. On a $350,000 home, that is $12,250. The down payment must come from eligible sources: personal savings, gifts from family (with gift letter), down payment assistance programs, or certain grants. Seller concessions (up to 6% of purchase price toward closing costs) are allowed but cannot apply to the down payment itself.
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Debt-to-income ratio limits
FHA allows housing DTI (monthly housing payment divided by gross monthly income) up to 31% and total DTI (all monthly debt payments) up to 43%, with compensating factors allowing up to 50% total DTI. Compare to conventional: typically 28% housing DTI and 36-45% total DTI. The more flexible FHA DTI limits are a significant advantage for borrowers with existing student loans, car payments, or other debt.
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Employment and income documentation
Two years of steady employment history is preferred. Two years of tax returns, recent pay stubs, and W-2s are required. Self-employed borrowers need 2 years of tax returns and a year-to-date profit and loss statement. Job changes within 2 years are acceptable if in the same field or with increased income. Gaps in employment require explanation and documentation.
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Property requirements for FHA
FHA loans require the property to meet minimum safety, security, and soundness standards per FHA appraisal guidelines. Properties must be move-in ready — significant repairs may fail FHA appraisal. Eligible property types: single-family homes, 2-4 unit properties (owner must occupy one unit), FHA-approved condominiums, and manufactured homes meeting HUD standards. The property must be your primary residence.
FHA vs Conventional: Which Costs Less?
FHA Loan
- ✓3.5% minimum down payment with 580+ score
- ✓Upfront MIP: 1.75% of loan amount at closing (can be financed)
- ✓Annual MIP: 0.55% of loan balance — lasts lifetime if <10% down
- ✓More flexible credit and DTI requirements
- ✓Loan limits: $498,257 in most areas, higher in high-cost areas (2024)
- ✓Best for: lower credit scores, limited down payment, high DTI
Conventional Loan
- ✗As low as 3-5% down with PMI, 20% to avoid PMI
- ✗No upfront mortgage insurance premium
- ✗PMI: 0.5-1.5% annually — cancels automatically at 22% equity
- ✗Stricter credit (typically 620+) and DTI requirements
- ✗Higher loan limits: up to $766,550 in most areas (2024)
- ✗Best for: better credit scores, stable income, 5%+ down payment
Frequently Asked Questions
When should I choose FHA over conventional?
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Choose FHA when: your credit score is below 620 and you cannot qualify for conventional, your DTI is above 43% and FHA's higher limit is necessary, you have limited down payment savings and FHA's 3.5% minimum is the only viable option, or you are using down payment assistance that specifically requires FHA. If you qualify for both, compare total costs over your expected ownership period — conventional with PMI often wins long-term due to PMI cancellation versus FHA's lifetime MIP.
Can I refinance from FHA to conventional later?
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Yes, and this is a common strategy. Buy with FHA when it is the only qualifying option, build equity through appreciation and payments, then refinance to a conventional loan once you have 20% equity to eliminate MIP entirely. The refinance involves closing costs (typically 2-4% of loan balance) and a new credit qualification — ensure your credit and income support conventional qualification before counting on this exit strategy.
What is the FHA loan limit for my area?
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FHA loan limits vary by county based on local median home prices. The 2024 baseline limit is $498,257 for single-family homes in most areas. High-cost areas (parts of California, New York, Hawaii, and others) have higher limits up to $1,149,825. Check FHA.com or HUD's website for the specific limit in your county. If the home price exceeds your county's FHA limit, you need a conventional, jumbo, or VA loan.
Can I get an FHA loan with a bankruptcy or foreclosure in my past?
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Yes, with waiting periods. Chapter 7 bankruptcy: 2-year waiting period from discharge date plus re-established credit. Chapter 13 bankruptcy: 1-year into the repayment plan with court approval. Foreclosure: 3-year waiting period from the date of foreclosure completion. These waiting periods are shorter than conventional loan requirements. Document re-established credit during the waiting period — on-time payments and low utilization accelerate recovery.
Are there FHA loans for investment properties?
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FHA loans are restricted to owner-occupied primary residences. However, FHA allows multi-unit properties (2-4 units) if the borrower occupies one unit as their primary residence. This makes FHA a viable path to house hacking — buying a duplex, triplex, or fourplex, living in one unit, and renting the others to offset housing costs. Rental income from the other units can be counted toward qualifying income (with restrictions).
What is the FHA streamline refinance?
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The FHA streamline refinance allows existing FHA loan holders to refinance with minimal documentation and no new appraisal, as long as the refinance provides a 'net tangible benefit' (typically a lower rate or payment). The streamlined process is faster and cheaper than a full refinance. It requires the loan to be current, at least 6 months old, and an improvement in your financial position. The simplified process makes it one of the easiest refinances available.
Check whether you qualify for an FHA loan
Calculate your eligibility, estimated payment with MIP, and compare to conventional options.
Check My FHA Eligibility