FHA loans are the most popular mortgage option for first-time homebuyers, and for good reason. They allow lower credit scores, smaller down payments, and more flexible income requirements than conventional loans. But there are trade-offs — and understanding the full picture can save you thousands of dollars over the life of your loan.
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the Department of Housing and Urban Development (HUD). Here's a critical distinction most people miss: the FHA does not lend you money. Your mortgage comes from a private lender — a bank, credit union, or online lender. The FHA simply insures the loan, which means if you default, the FHA pays the lender. This insurance is what allows lenders to offer more lenient qualification standards.
Because the government is absorbing some of the risk, lenders are willing to approve borrowers who might not qualify for a conventional mortgage. That includes people with lower credit scores, smaller savings for a down payment, or higher debt-to-income ratios.
FHA loans have two credit score tiers that determine your minimum down payment. If your credit score is 580 or higher, you qualify for the minimum 3.5% down payment. On a $300,000 home, that's $10,500 down. If your credit score falls between 500 and 579, you can still get an FHA loan but you'll need 10% down — $30,000 on that same home.
Below 500, you won't qualify for an FHA loan at all. In practice, many lenders set their own minimum higher than the FHA floor. Don't be surprised if a lender requires 620 or even 640, even though the FHA technically allows 580. If you're turned down, shop around — credit unions and smaller community lenders are more likely to work with scores in the 580 to 620 range.
If your score is just below 580, it may be worth spending a few months improving it before applying. Paying down credit card balances below 30% of their limits, disputing errors on your credit report, and becoming an authorized user on a family member's old account with a perfect payment history can each boost your score 20 to 40 points relatively quickly.
The 3.5% minimum down payment is one of the biggest advantages of FHA loans. On a $250,000 home, that's $8,750 compared to the $50,000 you'd need for 20% down on a conventional loan. Even the 3% down conventional options (like Fannie Mae's HomeReady) require a 620 credit score minimum, making FHA more accessible for borrowers with lower scores.
Your down payment can come from savings, a gift from family, a down payment assistance program, or even a grant from a state or local housing authority. FHA allows 100% of the down payment to be a gift — conventional loans have more restrictions on gift funds. The one requirement: the funds must be documented and sourced. Your lender will ask for bank statements showing where the money came from.
FHA loans have no minimum income requirement. Whether you earn $30,000 or $300,000, you can apply. What matters is your debt-to-income ratio (DTI) — the percentage of your gross monthly income that goes toward debt payments.
The standard FHA DTI limit is 43%. If you earn $6,000/month gross, your total monthly debt payments (including the new mortgage, car loans, student loans, credit cards, and any other debt) can't exceed $2,580. However, FHA allows DTI up to 50% with compensating factors such as significant cash reserves, a long employment history, or minimal payment increase compared to your current housing cost.
Your income must be verifiable. FHA requires two years of employment history (W-2 employees) or two years of tax returns (self-employed borrowers). Gaps in employment need to be explained, but they won't automatically disqualify you. A few months between jobs is common and usually fine as long as you're currently employed.
FHA loans come with property restrictions that don't apply to conventional mortgages. The home must be your primary residence — you can't use an FHA loan for an investment property or vacation home. You must move in within 60 days of closing.
The property must meet FHA minimum property standards, which means it needs to be safe, structurally sound, and habitable. An FHA appraiser will check for issues like peeling paint (lead paint concern in pre-1978 homes), faulty wiring, plumbing problems, roof damage, and structural issues. If the home fails the appraisal, the seller must make repairs before the loan can close — or the deal falls through.
FHA loans can be used for single-family homes, condos (if the condo project is FHA-approved), townhomes, and multi-unit properties up to 4 units (as long as you live in one unit). The multi-unit option is a powerful house-hacking strategy: buy a duplex, live in one side, rent the other, and use the rental income to help qualify for the loan.
Here's where FHA loans get expensive. You'll pay two types of mortgage insurance. First, an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. On a $290,000 loan, that's $5,075 — usually rolled into the loan balance rather than paid at closing.
Second, you'll pay annual MIP divided into monthly installments. For a 30-year loan with less than 10% down, the annual MIP rate is 0.55% of the loan balance. On a $290,000 loan, that's about $133/month in the first year, gradually decreasing as you pay down the balance.
The critical difference from conventional PMI: FHA MIP lasts for the entire life of the loan if you put less than 10% down. With conventional PMI, it automatically drops off once you reach 78% loan-to-value. This means FHA borrowers who stay in their home long-term will pay tens of thousands of dollars more in mortgage insurance over the life of the loan.
On a $290,000 loan, FHA MIP at 0.55% costs about $133/month. Conventional PMI on the same loan might cost $145 to $240/month (0.6% to 1% depending on credit score). FHA starts cheaper, but conventional PMI drops off after you reach 20% equity. If you plan to keep the loan for 10+ years, conventional PMI costs less overall despite the higher initial rate — because you stop paying it entirely.
FHA loan limits vary by county and are updated annually. In 2026, the floor (lowest limit in low-cost areas) is $524,225 for a single-family home. In high-cost areas like San Francisco, Los Angeles, and New York City, the ceiling reaches $1,209,750. Most counties fall somewhere in between. Check your county's limit on the HUD website or with your lender before house hunting.
Choose FHA when your credit score is below 680 and you have less than 10% to put down. The combination of a low score and small down payment is where FHA clearly beats conventional — conventional lenders either won't approve you or will charge a very high interest rate.
Choose conventional when your credit score is 700+ and you have at least 5% to 10% down. You'll get a competitive rate, lower (or no) mortgage insurance, and more flexibility on property types. Also choose conventional if you plan to keep the loan longer than 7 to 10 years, since the lifetime MIP on FHA loans makes them more expensive in the long run.
Many smart buyers start with FHA and refinance into a conventional loan once they've built 20% equity or improved their credit score. This gets you into a home now and eliminates MIP later. Just make sure the refinance math works — closing costs on a refinance typically run $3,000 to $6,000. Use our FHA loan calculator at /tools/fha-loan-calculator to compare your options.