How It Works
FHA loans are mortgages insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). Because the government insures the lender against losses if the borrower defaults, FHA-approved lenders can offer more lenient qualifying guidelines, lower down payments, and competitive interest rates.
The FHA loan program was created in 1934 to stimulate the housing market during the Great Depression, and it continues to serve borrowers who might not qualify for conventional financing. FHA loans are particularly popular with first-time homebuyers because of the low 3.5% down payment requirement with a credit score of 580 or higher. Borrowers with scores between 500 and 579 may still qualify with a 10% down payment.
One important consideration with FHA loans is the mortgage insurance premium (MIP). Borrowers pay an upfront MIP of 1.75% of the loan amount at closing (which can be rolled into the loan), plus an annual MIP that ranges from 0.45% to 1.05% depending on the loan amount and term. For loans with less than 10% down, MIP lasts for the life of the loan. For loans with 10% or more down, MIP can be removed after 11 years.
Who Is This For?
- First-time homebuyers who need a low down payment
- Borrowers with lower credit scores (580+ for 3.5% down)
- Buyers who have experienced past credit events like bankruptcy or foreclosure
- Those who receive down payment gifts from family members
- Borrowers who want flexible qualifying guidelines
Pros & Cons
Frequently Asked Questions
What is the minimum credit score for an FHA loan?+
FHA loans allow credit scores as low as 580 with a 3.5% down payment, or 500–579 with a 10% down payment. Most lenders impose overlays that require 620+ in practice.
How much down payment do I need for an FHA loan?+
3.5% is the minimum down payment for FHA loans with a credit score of 580 or higher. Borrowers with scores between 500 and 579 must put 10% down. The down payment can be 100% gifted from family.
Does FHA mortgage insurance go away?+
On most FHA loans, mortgage insurance premium (MIP) stays for the life of the loan. The exception is loans with 10% or more down, where MIP drops off after 11 years. Many borrowers refinance to a conventional loan once they reach 20% equity to eliminate MIP.
Can I use an FHA loan for an investment property?+
No. FHA loans are only for primary residences. You must occupy the home within 60 days of closing and live there for at least one year. 2–4 unit properties qualify only if you live in one unit.