Government
FHA Loan
A mortgage insured by the Federal Housing Administration that allows down payments as low as 3.5% and credit scores as low as 580. FHA loans are popular with first-time homebuyers because of their flexible qualifying requirements. The trade-off is that FHA loans require both an upfront mortgage insurance premium (1.75% of the loan) and annual mortgage insurance that lasts for the life of the loan in most cases.
Why It Matters
FHA loans are mortgages insured by the Federal Housing Administration. They're not government loans — private lenders make them, but the FHA guarantees repayment if you default. This insurance lets lenders offer loans with lower down payments (3.5% with 580+ credit score) and more flexible qualification standards than conventional loans.
The trade-off: FHA loans charge mortgage insurance premium (MIP) — 1.75% upfront (usually rolled into the loan) plus 0.55% annually on 30-year loans with less than 10% down. Unlike conventional PMI, FHA MIP lasts for the life of the loan and can only be removed by refinancing into a conventional loan. On a $300,000 FHA loan, MIP costs about $138/month — $49,500 over the life of the loan.
Real-World Example
Buying a $280,000 home with FHA: 3.5% down = $9,800 cash needed. Upfront MIP: $4,732 (rolled into loan). Loan amount: $275,332. Annual MIP: $1,514/year = $126/month. Total monthly PITI + MIP: approximately $2,100. Income needed (28% rule): ~$90,000/year.
Pro Tip
FHA is great to get into a home with minimal cash, but plan to refinance into conventional once you have 20% equity — that eliminates the lifetime MIP.