FHA loans are the most popular mortgage option for first-time buyers, and for good reason. Backed by the Federal Housing Administration, they offer lower credit requirements, smaller down payments, and more flexible qualification standards than conventional loans. But they also come with costs that conventional borrowers avoid. Here is everything you need to know before choosing an FHA 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). The FHA does not lend money directly — it insures loans made by approved private lenders. This insurance protects lenders against losses if borrowers default, which is why lenders are willing to offer more favorable terms to borrowers who might not qualify for conventional financing.
FHA loans have been around since 1934, created during the Great Depression to stimulate homeownership. Today they account for roughly 15-20% of all new mortgage originations and remain the go-to option for buyers with limited savings or credit challenges.
The minimum credit score for an FHA loan is 500, but the down payment requirement changes based on your score. With a 580 or higher credit score, you qualify for the minimum 3.5% down payment. With a score between 500 and 579, you need at least 10% down. Most lenders impose their own overlays and require a minimum of 580-620, even though FHA technically allows lower scores.
The hallmark of FHA financing is the 3.5% minimum down payment. On a $300,000 home, that is just $10,500. The down payment can come from savings, gifts from family members, employer assistance programs, or state and local down payment assistance grants. FHA is one of the few loan types that allows 100% of the down payment to be a gift.
FHA allows a front-end DTI (housing costs only) of up to 31% and a back-end DTI (all debts) of up to 43%. However, with compensating factors such as significant cash reserves, a long employment history, or minimal payment shock, FHA lenders can approve borrowers with back-end DTIs up to 50% or even higher. This flexibility is a major advantage over conventional loans, which typically cap at 45%.
The home must be your primary residence — FHA does not allow investment properties or vacation homes. The property must also meet FHA minimum property standards, which means it needs to be safe, secure, and structurally sound. An FHA appraisal is more rigorous than a conventional appraisal, and the appraiser will flag issues like peeling paint, broken handrails, leaking roofs, and non-functional systems.
FHA mortgage insurance is the main drawback of FHA financing, and it comes in two parts. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount, typically rolled into the loan balance. On a $290,000 loan, that adds $5,075 to your balance. The annual mortgage insurance premium (MIP) is 0.85% of the loan balance for most borrowers, paid monthly. On a $290,000 loan, that is about $205 per month.
The critical difference from conventional PMI: FHA MIP lasts for the life of the loan if you put less than 10% down. With conventional loans, PMI automatically cancels at 80% loan-to-value. To remove FHA MIP, you must refinance into a conventional loan — which requires at least 20% equity and a qualifying credit score. This lifetime MIP requirement is the single biggest reason to choose conventional over FHA if you qualify for both.
Choosing between FHA and conventional comes down to your credit score, down payment, and how long you plan to keep the loan. With a 720+ credit score and 5-10% down, conventional almost always wins because PMI is cheaper and cancellable. With a 580-660 credit score and 3.5% down, FHA is often the only viable option and provides a path to homeownership that conventional lending does not.
On a $300,000 home with 3.5% down, an FHA loan costs approximately $205/month in MIP. A conventional loan with 3% down and a 700 credit score might charge $175/month in PMI — but that PMI drops off at 80% LTV. Over 10 years, the conventional borrower saves roughly $15,000-$20,000 in total insurance costs. However, the conventional loan requires a higher credit score and stricter DTI limits.
FHA loan limits vary by county and are updated annually. In 2026, the floor (lowest limit areas) is $498,257 for a single-family home, while the ceiling (highest-cost areas like San Francisco and New York City) is $1,149,825. Most counties fall somewhere in between. If you need to borrow more than the FHA limit for your area, you will need a conventional or jumbo loan.
You can check the FHA loan limit for any county at HUD's website. In many affordable markets, the FHA limit is well above the median home price, giving buyers plenty of room. In expensive coastal markets, the limit can be a constraint that pushes buyers toward conventional financing.
The application process is similar to any mortgage. Start by finding an FHA-approved lender — most banks, credit unions, and mortgage companies are approved. Get pre-approved with at least 2-3 lenders to compare rates and fees. Gather your documentation: two years of tax returns, recent pay stubs, bank statements, and identification.
Once you find a home and make an offer, the lender will order an FHA appraisal (which includes the property condition assessment). If the appraisal comes in at or above the purchase price and the property meets FHA standards, you proceed to underwriting and closing. The entire process typically takes 30-45 days from contract to closing.
Choose FHA when your credit score is below 680, you have limited savings for a down payment, you have a higher DTI ratio, or you have had a bankruptcy or foreclosure in the past (FHA has shorter waiting periods). Avoid FHA when you have 10-20% for a down payment and a 700+ credit score, you are buying an investment property, the home does not meet FHA property standards (fixer-uppers often fail), or you want to avoid lifetime mortgage insurance.
Many first-time buyers start with FHA and refinance into a conventional loan after building equity and improving their credit. This is a perfectly valid strategy — just make sure you factor the refinancing costs into your overall plan.