FHA Loans: Requirements and Deciding If They’re Right For You
FHA loans are government-backed mortgages that are easier to qualify for than conventional loans. FHA loans give people with imperfect credit or limited down payment funds a more accessible way to buy a home, and are very popular with first-time homebuyers.
But an FHA loan also comes with extra costs that can add up over the life of a 30-year mortgage. Understanding the full picture of FHA loan requirements, loan limits and other unique loan features can help you decide whether it’s the best choice for you.
Key takeaways about FHA loans
→ A great option for homebuyers with low credit scores and small down payments who can’t qualify for a conventional loan.
→ A good alternative for borrowers who earn more income than most conventional, low-down-payment mortgage programs allow.
→ Mortgage insurance is required regardless of a borrower’s down payment amount, which can make the loan more expensive overall than a conventional loan.
→ It’s important to compare the full costs of an FHA loan, since FHA mortgage insurance premiums can bump up your APR.
FHA loan requirements: Who qualifies?
FHA loan requirements are generally easier to meet than other loan programs, which is why FHA loans are popular among first-time homebuyers.
Here’s an overview of the FHA’s minimum mortgage requirements:
- Credit score: 500 (10% down payment), 580 (3.5% down payment)
- Down payment: 3.5% (score 580 or higher), 10% (score of 500 to 579)
- Debt-to-income ratio: 43%
- Mortgage insurance: Required
- Income limits: None
- Occupancy: Primary residence only
- Loan limits: Yes
- Federal debt check: Required
Learn more about each requirement below.
You may qualify for an FHA loan with a score as low as 580 if you’re making the minimum 3.5% down payment, or 500 if you’re putting down 10% or more.
FHA loans work for people with imperfect credit
FHA loans may be the only choice for some borrowers who are repairing their credit or may have derogatory or delinquent accounts in their credit history. Major credit events like bankruptcies and foreclosures require a four- to seven-year wait time for conventional financing. However, you’re eligible for an FHA loan:
- Two years after a Chapter 7 bankruptcy
- Three years after a foreclosure
Lenders divide your total debt by your pretax income to determine your debt-to-income (DTI) ratio. Historical data shows that the higher your ratio, the harder it is to make your monthly mortgage payment, which is why lenders prefer this ratio to be lower.Even though FHA guidelines set the maximum at 43%, you can qualify with a DTI ratio above 50% if you have a strong credit score and extra cash reserves.
The FHA requires two types of FHA mortgage insurance on every FHA loan:
- Upfront mortgage insurance premium (UFMIP) that costs 1.75% of the loan amount and is typically added to your mortgage balance.
- Annual mortgage insurance premium (MIP) that costs between 0.15% and 0.75% of the loan amount. The annual cost is divided by 12 and added to your monthly mortgage payment.
How to reduce your monthly FHA insurance costs
Another perk of FHA loans is that there are no income limits. That’s good news if you’re low on down payment funds but earn more than the median income for your location, as many down payment assistance (DPA) programs are only open to people making less than the area median income (AMI).To qualify for an FHA loan, you’re not required to have been employed for a specific amount of time — but you will need to show pay stubs covering the last 30 days. You’ll also need documentation, such as W-2s, for any jobs held in the last two years. Be prepared to provide explanations for any large gaps in your employment.
HUD caps how much you can borrow when it sets FHA loan limits each year. The limits are a percent of the conforming loan limits set annually by the Federal Housing Finance Agency.
The bottom line: You can’t borrow as much money with an FHA loan as you can with a conventional loan. You can find your local loan limits on the FHA mortgage limits website. Our table below breaks down the 2024 national limits for low- and high-cost areas.
| Number of units | Low-cost area limits | High-cost area limits |
|---|---|---|
| One unit | $498,257 | $1,149,825 |
| Two units | $637,950 | $1,472,250 |
| Three units | $771,125 | $1,779,525 |
| Four units | $958,350 | $2,211,600 |
Tip: Choose a conforming loan for higher loan amounts
FHA loan rates
FHA mortgage rates are typically lower than conventional loan rates. However, only FHA-approved lenders can offer FHA loan rates, so you may have fewer options to compare when shopping for the best rate.
Current FHA mortgage rates
Loan Product | Interest Rate | APR |
|---|---|---|
| 30-year fixed rate FHA mortgage | 6.24% | 6.91% |
| 30-year fixed rate FHA refinance | 6.66% | 7.41% |
How does an FHA loan work?
An FHA loan is a mortgage insured by the FHA, but the loan requirements are set by the U.S. Department of Housing and Urban Development (HUD). FHA-approved lenders can provide home loans to borrowers with low credit scores and small down payments — many of whom can’t qualify for a conventional loan.
However, the mortgage insurance you’re required to pay for when you take out an FHA loan can make these loans pricey. That said, some costs will be lower with an FHA loan. For example, you may pay less total interest, since FHA loan rates are typically lower than conventional loan rates.
The FHA loan process
You have to go through an FHA-approved lender to get an FHA loan — typically this will be a bank, credit union or direct lender. Otherwise, the basic process for getting an FHA loan is the same as for any other mortgage loan:
- You document your income and assets to qualify
- Your lender pulls your credit report
- You provide your employment and address history
For additional help, we cover how to get an FHA loan in more detail below.
Types of FHA loans
Learn about the types of FHA loans available and what they’re used for here.
FHA purchase loan
Most homebuyers choose a “standard” FHA loan to buy or refinance their home. Also called the 203(b) loan program, this type of FHA loan features the down payment and credit score requirements discussed above.
Who it’s good for: Low-credit-score borrowers who don’t have a lot saved for a down payment.
FHA refinance loan
If you have at least a 580 credit score, you can replace your current FHA loan with a new one and borrow up to 97.75% of your home’s value. You can also roll your FHA closing costs into the total loan amount. This is commonly known as a “rate-and-term” refinance.
Who it’s good for: Homeowners who don’t have enough equity or a high-enough credit score to qualify for a conventional refinance.
FHA streamline refinance
If you have an existing FHA loan, an FHA streamline refinance can help you lower your monthly payments or change your term. An added bonus: You can skip providing income documents and paying for a home appraisal, which makes the process easier than a regular FHA refinance.
Who it’s good for: Homeowners who have a current FHA loan and want to save money with a new FHA loan.
FHA cash-out refinance
You may qualify to borrow more than you currently owe and pocket the difference in cash with an FHA cash-out refinance — even with a credit score as low as 500. But you can’t borrow more than 80% of your home’s value, and the cash-out option only applies if the home is your primary living place.
Who it’s good for: Homeowners who want to tap their home’s equity to pay off debt or meet other financial goals.
FHA 203(k) renovation loan
Buy or refinance a home and roll the renovation costs into the same mortgage with the 203(k) loan program. You can choose the limited program for smaller projects (under $35,000), while the standard program gives you more cash for larger ones.
Who it’s good for: Borrowers who want to buy or refinance a home and roll the cost of repairs into one loan.
Home equity conversion mortgage (HECM)
The HECM loan, more commonly known as a “reverse mortgage,” gives borrowers ages 62 or older multiple ways to convert their home equity to cash or income. The big selling point is that, unlike a regular mortgage, there’s no monthly payment. The amount you can qualify to borrow is based on the youngest homeowner’s age.
Who it’s good for: Seniors who want to convert their equity to income, a credit line, a lump-sum payout or a combination of all three.
FHA energy-efficient mortgage
Called an EEM for short, an energy-efficient mortgage program lets you add the cost of energy-saving upgrades to the balance of a purchase or refinance loan. To find out how much you can add to your loan, reach out to your lender. They can access an FHA EEM calculator that will determine how much you can borrow.
Who it’s good for: Homebuyers or homeowners who want to add the cost of green upgrades to their home loan.
FHA GPM and GEM loans
Two lesser-used loan programs are the graduated payment mortgage (GPM) and growing equity mortgage (GEM). The GPM loan starts off with negative amortization (meaning your balance will actually grow during the first few years) and has monthly payments that increase each year. If you’d like to pay off your mortgage earlier, monthly payments on a GEM loan increase on a set schedule to shrink your principal balance at a quicker pace.
Who it’s good for: Homebuyers who want the lowest payment early in their career or plan to pay off their loan faster as their income grows.
How the FHA helps if you can’t make your mortgage payments
Pros and cons of FHA loans
| Lower credit score minimums. You may qualify with scores 40 to 120 points lower than conventional loans. | Higher mortgage insurance costs. You’re stuck with the bill for two types of mortgage insurance, compared to one for conventional loans. |
| Higher DTI ratio limits. A heavy debt load is less of an obstacle than it is for conventional loans. | Life-of-loan mortgage insurance is required with a minimum down payment. In this scenario, the only way to remove it is to refinance to a different loan type. |
| Credit scores don’t impact mortgage insurance premiums. Conventional PMI, on the other hand, may be unaffordable with a lower credit score. | Mortgage insurance is required regardless of the down payment amount. A 20% down payment on an FHA loan still requires mortgage insurance. |
| Variety of programs. Choose from renovation, reverse and energy-efficient loan options. | Limited to primary residences. You’ll need a conventional loan to buy a second home or investment property. |
| No maximum income limits. This is good news if you make too much for a conventional first-time homebuyer loan program or down payment assistance program. | Lower maximum loan limits. You give up more than $268,000 of borrowing power by choosing an FHA loan over a conventional loan. |
| Refinance programs available without income verification or an appraisal. Conventional loan requirements don’t offer this flexibility. | Closing costs can’t be rolled into an FHA streamline refinance loan. You can only finance interest and FHA mortgage insurance. |
Should I get an FHA loan?
An FHA loan could be a good idea for you if:
You’re looking to get a home without making a large down payment — especially if you don’t qualify for conventional low-down-payment loan programs.
You’re struggling to meet the credit requirements for a conventional loan. FHA loans allow credit scores as low as 500.
Just be sure that you compare the full costs associated with any loans you’re considering. An FHA loan may come with a lower interest rate and more flexible requirements, but mortgage insurance costs can bump up the annual percentage rate (APR).
FHA vs. conventional loans
Many times the choice between an FHA and conventional loan comes down to your credit score and total debt. Conventional loans are the most popular type of mortgage, but borrowers have to meet higher qualifying standards to get approved for one.
The table below highlights the major differences between FHA and conventional loans.
| Minimum down payment | 3.5% with a 580 credit score | 3% |
| Minimum credit score | 500 to 579 with a 10% down payment | 620 |
| Maximum DTI ratio | 43% with exceptions up to 50% or higher | 45% with exceptions up to 50% |
| Maximum loan limits | Lower than conventional loan limits | Higher than FHA loan limits |
| Appraisal requirements | Required on all purchase loans | May be waived on some purchase and refinance loans |
| Mortgage insurance |
|
|
| Occupancy | Primary residence only | Primary, second or investment home |
| Streamline refinance available? | Yes | No |
What is the difference between FHA mortgage insurance and private mortgage insurance (PMI)?
There are two important differences between FHA mortgage insurance and the private mortgage insurance offered on conventional loans.
- All FHA loans come with FHA mortgage insurance requirements, while only conventional borrowers who put down less than 20% have to pay for private mortgage insurance.
- Your credit scores don’t impact FHA mortgage insurance premiums. You’ll pay the same FHA mortgage insurance premiums regardless of your credit score. PMI premiums, on the other hand, vary by credit scores and may be too costly for low-credit-score borrowers.
- You can’t cancel FHA mortgage insurance (in most cases). If you make less than a 10% down payment, you’re required to pay FHA mortgage insurance for the life of the loan. If you put down at least 10%, you’ll still have to pay mortgage insurance, but the monthly charge will drop off automatically after 11 years. Conventional loan borrowers, on the other hand, can cancel their PMI as soon as they reach 20% home equity.
- You could get a refund on FHA mortgage insurance if you refinance. When you apply for an FHA loan, your new address is tied to an FHA case number. If you decide to refinance your mortgage later, a lender will use the case number to determine if you’re owed a refund for FHA mortgage insurance you’ve already paid.
It makes sense to choose an FHA loan if:
Your credit score is below 620
You can’t afford a large down payment
You have a bankruptcy or foreclosure in your credit history
You earn too much income to qualify for conventional low-down-payment programs like Fannie Mae HomeReady or Freddie Mac Home Possible.
It makes sense to choose a conventional loan if:
You need to borrow more than FHA loan limits allow
You can afford to make a 20% down payment
You want to buy a vacation home or investment property
How much do I need to make to buy a $300,000 house with an FHA loan vs conventional loan?
For a $300,000 home purchase at today’s rates, you’d need around $1,840 per month to cover your FHA loan payments or $2,333 per month to cover conventional loan payments.
How much of your income you can afford to spend on housing is ultimately up to you, but a common rule of thumb, known and the “28/36 rule,” is to keep your monthly mortgage payment to 28% or less of your gross monthly income (mortgage lenders sometimes call this your “front-end” DTI ratio).
- To maintain a 28% front-end DTI ratio with that $1,840 monthly FHA mortgage payment, you’d need to earn at least $78,864 annually. To do the same with a conventional loan payment of $2,333 per month, you’d need to be bringing in at least $99,984 annually.
- The “36” refers to keeping your total DTI ratio for all of your monthly debt payments — housing payments and otherwise — to 36% or less of your gross monthly income (this version of your DTI is sometimes called a “back-end” DTI ratio).
The best FHA lenders of 2024
Lender | User ratings | LendingTree rating | Min. credit score (FHA loans) | Min. down payment (FHA loans) | Rate spread
Rate spread is the difference between the average prime offer rate (APOR) — the lowest APR a bank is likely to offer any private customer — and the average annual percentage rate (APR) the lender offered to mortgage customers in 2022. The higher the number, the more expensive the loan.
| Avg. loan costs
Average total loan costs include origination fees and are based on 2022 data from the Federal Financial Institutions Examination Council (FFIEC).
|
|---|---|---|---|---|---|---|
User Ratings & Reviews
Ratings and reviews are from real consumers who have used the lending partner’s services. | 580 | 3.5% | 0.27% | $8,230 | ||
User reviews coming soon | 580 | 3.5% | 0.74% | $6,514 | ||
User Ratings & Reviews
Ratings and reviews are from real consumers who have used the lending partner’s services. | 600 | 3.5% | 0.34% | $9,067 | ||
User Ratings & Reviews
Ratings and reviews are from real consumers who have used the lending partner’s services. | 500 | 3.5% | 1.06% | $8,795 |
Best FHA loan lender for access to mortgage rates online: PennyMac
PennyMac at a glance
- Minimum credit score (FHA loans): 580
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, streamline refinance, cash-out refinance
- Additional loan products: Conventional, VA, home equity, jumbo
- LendingTree rating:
Read review
Best FHA loan lender for online experience: Flagstar Bank
Flagstar Bank at a glance
- Minimum credit score (FHA loans): 580
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase
- Additional loan products: Conventional, VA, USDA, jumbo, HELOCs
- LendingTree rating: Read review
Best FHA loan lender overall: AmeriSave Mortgage
AmeriSave Mortgage at a glance
- Minimum credit score (FHA loans): 600
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, streamline refinance, cash-out refinance
- Additional loan products: Conventional, VA, USDA, jumbo
- LendingTree rating:
Read review
Best FHA loan lender for bad credit: Carrington Mortgage Services
Carrington Mortgage at a glance
- Minimum credit score (FHA loans): 500
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, refinance, streamline refinance
- Additional loan products: Conventional, VA, jumbo, USDA
- LendingTree rating:
Read review
Ready to compare customized loan offers on LendingTree?How to get an FHA loan
Here are eight basic steps to follow when finding and applying for an FHA loan:
1. Shop with several FHA-approved lenders.
Compare the rates and costs of at least three to five lenders, including mortgage brokers, mortgage lenders and local banks or credit unions. If you don’t know where to start, check out our list of the best FHA lenders.
You can also put your basic financial information into an online rate comparison site like LendingTree and have lenders call you with their best offers.
2. Ask the right questions.
Asking the following questions may help you narrow down your lender choices:
- What is your lender’s minimum credit score requirement? Lenders may set higher credit score standards than the FHA actually requires.
- Can you use down payment assistance (DPA) with your FHA loans? Consider local down payment assistance programs. They might cover both your down payment and some closing costs. Some DPA programs require approval from your bank or lender. Check if you’re working with a lender that allows the DPA program you’re interested in.
3. Complete a loan application.
Have basic information handy about your income, monthly debts and down payment funds as you fill out the application.
Ready to compare FHA lenders and rates? Get Quotes Today4. Give the lender permission to verify your credit scores.
The lender will pull a credit report to verify that you meet the minimum FHA credit score requirement.
5. Provide two years of employment and income history.
Collect pay stubs for the last 30 days, the last two years of W-2s or federal tax returns and employer contact information. You won’t need as much paperwork if you’re applying for a special FHA program, like a reverse mortgage or streamline refinance.
6. Document your down payment source.
Lenders typically review two months’ worth of bank statements, or need a letter explaining where the down payment and closing cost funds are coming from.
7. Explain and document any defaulted federal debt.
If you’ve recently paid off defaulted student loans or other government debt, give your lender a letter of explanation and supporting documents. You won’t get approved if you haven’t repaid other government-backed loans.
Learn more about what to do if your mortgage loan was denied.
8. Get an FHA appraisal.
You’ll need to get an FHA appraisal — which includes a detailed analysis of the safety and livability of your home — no matter your down payment percent or credit score. A typical FHA appraisal will cost you $400 to $700, compared to between $300 and $500 for a conventional loan appraisal. FHA loans don’t offer an appraisal waiver on purchase loans like some conventional loans do.
You can cancel your sales contract after a low appraisal. An “amendatory clause” is included in your FHA mortgage paperwork. It gives you the right to cancel your contract if the appraised value is lower than the sales price.
How much are FHA loan closing costs?
You’ll pay between 2% and 6% of your loan amount toward FHA closing costs. Besides mortgage insurance, there are some closing cost features unique to FHA loans.
- More closing costs can be paid by the seller. FHA rules allow the seller to contribute up to 6% of the home’s purchase price toward your closing costs, which is more than the 3% maximum conventional guidelines allow with a minimum down payment.
- Closing cost assistance. Many states and nonprofits offer down payment and closing cost assistance to qualifying FHA loan borrowers. A great place to begin is to research first-time homebuyer programs in your state. Even if you’re not a first-time homebuyer, you may still qualify.
Frequently asked questions
It takes 44 days to close an FHA loan, on average, according to data from ICE Mortgage Technology.
The major factors that can disqualify you for an FHA loan are a low credit score, high DTI ratio and a history of defaulting on federal debt. Federal debt includes VA and USDA loans and unpaid child support. You’ll also need to show that you have enough cash to meet the minimum down payment requirement.
FHA-approved lenders can preapprove you for an FHA loan based on your income, debt and credit scores. However, the home you buy will need to meet the FHA’s strict minimum property requirements for final approval.
You can either wait 11 years after making a 10% down payment on an FHA loan, or refinance to a conventional loan. Only conventional loans offer additional options to get rid of mortgage insurance.
There are three factors that determine the maximum amount you can get from an FHA loan.
- Your DTI ratio, which lenders calculate based on your income and total debt (including the new mortgage payment)
- Your location, which sets the FHA loan limits for local lenders
- Your property type and number of units (loan limits are higher for two- to four-unit homes)
Your best bet is to get preapproved with a loan officer for the most accurate estimate of the FHA loan amount you qualify for.
The years of extra mortgage insurance premiums on an FHA loan can push the total cost of borrowing an FHA loan higher than the total cost of a conventional loan.
Interest rates offered on FHA loans are almost always lower than those offered on conventional loans. However, the APR disclosed on Page 3 of your loan estimate — which represents your total cost of borrowing — also includes ongoing fees like mortgage insurance.