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What is an FHA loan, and how do you qualify?

Updated 4 min read

For nearly 100 years, the Federal Housing Administration has helped families achieve the goal of homeownership. Some 50 million loans insured by the FHA have been issued by approved lenders tailored to stimulate homeownership, particularly for first-time home buyers and low-to-moderate-income households.

A much greater assortment of mortgage loan types is available to potential home buyers today than in 1934. Here's how a government-backed FHA loan stacks up to the 2024 home loan alternatives.

Read more: What are government home loans?

An FHA loan is a mortgage insured by the Federal Housing Administration. The FHA is a primarily self-funded division of the Department of Housing and Urban Development. It guarantees loans meeting particular requirements that are issued by participating FHA lenders. Protecting lenders against loan losses allows the FHA to insure more loans, broadening its reach to households with lower incomes and less savings.

Learn more: FHA vs. VA loan — what are the differences?

An FHA loan can be used to purchase a home or refinance a mortgage and has specific benefits and requirements, including:

  • Less stringent credit qualifications than conventional loans.

  • Loan limits that vary by county, capping the maximum lendable value of a property.

  • FHA mortgage insurance premiums that are paid by the borrower but protect the lender from a loan default.

Learn more: FHA cash-out refinance — requirements and guidelines

Long before 3% down payments were available on conventional mortgages, FHA home loans were the original low-down-payment option. A FICO score of 580 or higher will qualify a borrower for a down payment of only 3.5%. A credit score as low as 500 will require 10% down.

Yahoo note: If you're a public servant who qualifies for the Good Neighbor Next Door program, you can get an FHA loan with a down payment of only $100.

Specific FHA loan requirements can vary by lender, but generally, FHA home loan eligibility depends on the following conditions.

A borrower must have a FICO credit score of 500 or higher to qualify for an FHA loan. When two or more borrowers apply for an FHA loan, the lowest individual score is considered.

A debt-to-income ratio (DTI) is calculated by taking the total of existing monthly debt plus the estimated monthly mortgage payment divided by gross monthly income. FHA loans generally require a DTI of 43% or less, though exceptions can be made with higher credit scores and additional factors considered. (See table below.)

The FHA offers mortgage loans up to a purchase-price maximum determined by county, with distinctions made for low-cost and high-cost areas. In 2024, the maximum single-family loan limit in a low-cost county is $498,257. For high-cost counties, the maximum loan is $1,149,825. Higher limits are designated for Alaska, Hawaii, Guam, and the Virgin Islands.

An FHA Mortgage Limits search tool allows you to search for maximum FHA loan values by county.

Dig deeper: FHA vs. USDA loans

To protect lenders from losses, the FHA charges upfront and ongoing FHA mortgage insurance premiums. The upfront MIP can be paid as part of your FHA closing costs or financed as part of the loan. The annual MIP is built into the monthly mortgage payment.

The ongoing mortgage insurance premium is for the life of the loan, except for a loan where the borrower made a down payment of 10% or more. In that case, you can remove FHA mortgage insurance after 11 years.

Read more: FHA Streamline Refinance — How does it work, and who is eligible?

Some of the key differences between FHA loans and conventional HomeReady and Home Possible mortgages include:

Dig deeper: FHA vs. conventional loan: Which should you choose?

  • Lower credit score requirement than conventional loans.

  • Down payment as low as 3.5%.

  • No income limits.

  • No homeownership education is required.

  • You have the option to use an adjustable-rate mortgage.

  • Mortgage insurance required for the life of the loan if a borrower puts down less than 10%.

  • Loan limits can put some homes with higher purchase prices out of reach.

  • Can be more expensive than a conventional loan for more well-qualified borrowers.

Dig deeper: Pros and cons of FHA loans

An FHA loan is a mortgage backed by the Federal Housing Administration. This means if you default on mortgage payments, the FHA will help reimburse your mortgage lender. You may qualify for an FHA mortgage loan if you have a 580 credit score, 3.5% down payment, and a debt-to-income ratio of 43% or less.

A downside of FHA loans is that you have to pay mortgage insurance for the entire life of the loan if your down payment is less than 10%. With conventional loans, you may be able to get rid of your private mortgage insurance once you reach 20% equity in your home.

It's relatively easy to get an FHA loan, because they're targeted to first-time home buyers and people who may have lower credit scores or a high amount of debt. If you have a 580 credit score and 3.5% down payment, there's a good chance you'll be approved.