FHA Loans Explained: What Every First-Time Buyer Should Know

FHA loans are government-backed mortgages insured by the Federal Housing Administration. They offer flexible credit requirements and down payments as low as 3.5% for eligible borrowers, subject to program guidelines.

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What Is an FHA Loan?

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 insures the loan against default, approved lenders can offer more flexible credit and down payment requirements than most conventional programs.

FHA loans are not issued by the government directly. They are originated by FHA-approved lenders and insured by FHA. This insurance protects the lender if the borrower defaults - which is why mortgage insurance premiums are required on all FHA loans. Program rules are governed by HUD Single Family Housing Policy Handbook 4000.1.

Who FHA Loans May Fit

FHA loans may be worth comparing if you:

  • Are purchasing your first home and have limited savings for a down payment
  • Have a credit score below 700 but meet minimum FHA requirements
  • Have had a past bankruptcy or foreclosure but have rebuilt your credit
  • Are purchasing a modestly priced home within FHA loan limits for your county

FHA loans are for primary residences only. They cannot be used to purchase investment properties or vacation homes.

Down Payment and Credit Requirements

FHA guidelines establish two down payment tiers based on credit score:

  • Credit score 580 or higher: Minimum down payment of 3.5%
  • Credit score 500 to 579: Minimum down payment of 10%

These are FHA minimums. Individual lenders may apply overlays, meaning they set higher score or down payment floors than FHA requires. Contact a licensed lender about what requirements apply to your specific scenario.

The down payment may come from the borrower’s own savings, a gift from an eligible donor, or certain approved down payment assistance programs, subject to lender and program guidelines.

Mortgage Insurance Premium (MIP)

All FHA loans require two forms of mortgage insurance. Rates and rules are published by HUD and governed by Handbook 4000.1, Appendix 1.0:

  • Upfront MIP: 1.75% of the base loan amount, typically financed into the loan at closing
  • Annual MIP: Paid monthly as part of your mortgage payment. The rate varies based on loan term, loan amount, and loan-to-value (LTV) ratio

In February 2023, HUD reduced annual MIP rates by 30 basis points for most new FHA loans - a meaningful reduction in monthly cost for eligible borrowers.

MIP duration depends on your down payment:

  • Less than 10% down: MIP is required for the life of the loan
  • 10% or more down: MIP may be removed after 11 years

Unlike conventional PMI, FHA MIP cannot be cancelled based on home equity alone for loans with less than 10% down. Borrowers who want to eliminate MIP in that scenario typically refinance into a conventional loan once they have sufficient equity.

FHA Loan Limits

FHA loan limits vary by county and are updated annually. For 2026, the national “floor” for a one-unit property is $541,287 and the “ceiling” in high-cost areas is $1,249,125, per HUD Mortgagee Letter 2025-23. Multi-unit properties have higher limits.

Your loan amount cannot exceed the FHA limit for the county where the property is located. Use HUD’s FHA Mortgage Limits lookup tool to find the current limit for a specific county.

Property Requirements

FHA-financed properties must meet FHA Minimum Property Standards, which address the safety, soundness, and security of the home. An FHA appraisal evaluates both the market value of the property and whether it meets these standards. Properties with significant deferred maintenance or code violations may not qualify without repairs.

Benefits of FHA Loans

  • Lower minimum credit score thresholds than most conventional programs
  • Down payments as low as 3.5% for eligible borrowers
  • More flexible debt-to-income ratio guidelines in some cases
  • Assumable by a qualified buyer when you sell, which can be valuable if rates are higher at the time of sale

Limitations of FHA Loans

  • Mortgage insurance is required for the life of the loan for borrowers with less than 10% down
  • Primary residences only - no investment properties or second homes
  • Loan amounts capped at county-specific limits
  • Property must meet FHA Minimum Property Standards
  • Higher total cost over time compared to conventional for borrowers who qualify for both

Frequently Asked Questions

What credit score do I need for an FHA loan?

FHA guidelines allow for credit scores as low as 500. Borrowers with scores below 580 are required to put 10% down. Borrowers with 580 or higher may qualify with 3.5% down. Individual lenders may apply higher minimum score requirements (called overlays). These rules are established in HUD Single Family Housing Policy Handbook 4000.1. Contact a licensed lender about your specific credit profile.

How much is the down payment on an FHA loan?

The minimum down payment is 3.5% for borrowers with credit scores of 580 or higher. Borrowers with scores between 500 and 579 are required to put down at least 10%. The down payment can come from personal savings, a gift from an eligible family member, or certain approved down payment assistance programs, subject to lender and program guidelines.

What is mortgage insurance premium (MIP) on an FHA loan?

FHA loans require two forms of mortgage insurance: an upfront premium of 1.75% of the base loan amount (typically financed into the loan) and an annual premium paid monthly. In 2023, HUD reduced annual MIP rates by 30 basis points for most new FHA loans. For loans with less than 10% down, MIP remains for the life of the loan. Borrowers putting 10% or more down can have MIP removed after 11 years. Current rate tables are published on HUD's annual MIP rates page.

Can I use gift money for my FHA down payment?

Yes. FHA guidelines allow the entire down payment to come from a gift, as long as it is from an eligible donor - typically a family member, employer, labor union, close friend with a clearly defined interest, or a government or nonprofit agency. The gift must be documented with a signed gift letter stating that no repayment is expected. A lender will also need to source and document the gift funds. This makes FHA one of the more flexible programs for buyers who have family support but limited personal savings.

Does an FHA loan require a home inspection?

FHA requires an FHA appraisal, which evaluates both the market value of the property and whether it meets FHA Minimum Property Standards - but an appraisal is not the same as a home inspection. The FHA appraisal is conducted for the lender's benefit and does not check every system in detail the way an independent inspection does. As a buyer, you have the right to hire a licensed home inspector separately, and it is strongly recommended. An appraisal passing FHA standards does not guarantee the home is free of defects or undisclosed issues.

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Subject to credit, income, property, program, and lender guidelines. Contact us with questions about your specific scenario.

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