An FHA loan is a mortgage insured by the Federal Housing Administration, a division of HUD. Unlike conventional loans, FHA loans are designed specifically to help borrowers who don't fit the conventional credit-and-income profile: lower credit scores, smaller down payments, or higher debt-to-income ratios. They're especially popular with first-time buyers — about 80% of FHA loans go to first-timers — but anyone can use one if they qualify.
How an FHA Loan Differs From a Conventional Loan
The federal government doesn't lend you the money — a private lender does. What FHA provides is an insurance policy: if you default, FHA pays the lender. That guarantee lets the lender accept lower credit scores and smaller down payments than they would otherwise.
In exchange, FHA borrowers pay for that insurance through Mortgage Insurance Premiums (MIP) — and unlike conventional PMI, FHA MIP doesn't go away once you build equity. For most FHA loans originated today, MIP lasts the full life of the loan unless you refinance into a conventional mortgage.
FHA loans with less than 10% down have lifetime MIP. Loans with 10% or more down have MIP for 11 years. There's no equity-based cancellation. The only way to drop MIP early is to refinance into a conventional loan once you reach 20% equity.
Down Payment and Credit Requirements
- Credit score 580+: minimum 3.5% down payment.
- Credit score 500–579: minimum 10% down payment.
- Below 500: not eligible.
- Debt-to-income ratio: up to 43% standard, with some flexibility for strong compensating factors.
- Down payment can be 100% gifted from family members.
- Two years of employment history (gaps OK with explanation).
The Two Mortgage Insurance Premiums
FHA charges two separate insurance premiums, and you'll pay both:
| Premium | Amount | When Paid |
|---|---|---|
| Upfront MIP (UFMIP) | 1.75% of the loan amount | At closing (often rolled into the loan) |
| Annual MIP | 0.45% – 0.85% of loan balance/yr | Monthly, for life of loan (typically) |
On a $300,000 loan with 3.5% down, you'd pay $5,063 in UFMIP at closing plus around $137/month in annual MIP at the 0.55% rate. Over 30 years, that's nearly $55,000 in mortgage insurance.
FHA Loan Limits
FHA caps the loan amount based on county. In 2025, the floor (for low-cost areas) is $498,257 and the ceiling (for high-cost metros) is $1,149,825. Most areas fall somewhere in between. You can look up your specific county limit on the HUD website. If your purchase price exceeds the FHA cap, you'll need conventional or jumbo financing.
When FHA Makes More Sense Than Conventional
A common strategy: buy with FHA when your credit or cash is tight, then refinance into conventional once you've built equity and improved your credit. This drops the lifetime MIP and locks in the lower long-term cost.
| Your Situation | FHA | Conventional |
|---|---|---|
| Credit score 580–620 | ✓ Easier qualification | ✗ Usually denied or expensive |
| Credit score 620–680, low cash | ~ Competitive | ~ Competitive |
| Credit score 700+, 5%+ down | ✗ Conventional usually wins | ✓ Better long-term cost |
| Plan to stay 5+ years with rising equity | ✗ MIP lasts the life of the loan | ✓ PMI auto-cancels at 78% LTV |
| Self-employed with rough tax history | ✓ More flexible underwriting | ~ Harder to qualify |
FHA is the right tool when conventional financing won't accept you yet — but it's rarely the right tool to keep forever. If you qualify with a 660+ credit score and at least 5% down, run both scenarios through the Mortgage Calculator and compare the 5-year and 10-year total cost. For many borrowers, the FHA path makes sense for the first 2–4 years, then conventional refinancing becomes the right move once equity and credit allow it.
