What an FHA loan is and who offers it

An FHA loan is a mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The FHA does not lend the money itself — a bank, credit union, or mortgage company does. What the FHA does is promise to cover the lender's loss if you stop paying. That promise lets lenders offer mortgages to people with lower credit scores, smaller down payments, or less savings than conventional loans require.

Because the FHA backs the loan, you pay mortgage insurance on top of your regular payment. That insurance protects the lender, not you. It stays on your loan for the life of the mortgage if you put down less than 10 percent, or for at least 11 years if you put down 10 percent or more. The insurance cost varies by loan size and down payment, but typically runs between 0.55 and 1.80 percent of the loan amount per year, added to your monthly payment.

You can get an FHA loan through any lender approved by the FHA — most major banks, credit unions, and mortgage brokers are. The lender decides whether to offer you the loan based on your credit, income, and debt. The FHA sets the rules about who can borrow and how much, but the lender makes the final call.

Key Takeaways

  • An FHA loan requires a down payment as low as 3.5 percent, compared to 5 to 20 percent for conventional mortgages, and accepts credit scores as low as 580.
  • You will pay mortgage insurance for the life of the loan (or at least 11 years), which adds to your monthly payment and is a real cost you should factor into affordability.
  • The FHA sets maximum loan amounts that vary by county, and you cannot borrow more than that limit even if a lender would offer it.
  • You need a steady income history, a signed purchase agreement for a specific property, and a property appraisal that meets FHA standards before a lender will approve you.
  • The process from process to closing typically takes 30 to 45 days, and you should start by contacting FHA-approved lenders, not the FHA itself.

Down payment and credit score requirements

The FHA allows a down payment as low as 3.5 percent of the purchase price. If you are buying a $200,000 home, that means putting down $7,000. Conventional loans typically require 5 to 20 percent down, so the FHA option opens homeownership to people who have not saved as much.

The FHA accepts credit scores starting at 580. If your score is between 580 and 619, you must put down the full 3.5 percent. If your score is 620 or higher, you have more flexibility with some lenders, though 620 is still considered lower credit. A score below 580 disqualifies you from FHA loans entirely. Your credit score reflects your payment history, how much debt you carry, and how long you have had credit accounts open.

The down payment does not have to come from your own savings. The FHA allows gifts from family members, employers, nonprofits, or government programs to cover part or all of it. The gift must be documented in writing, and the giver cannot expect repayment. If you receive a gift, you will need a letter from the person or organization stating the amount and that it is a gift, not a loan.

Income, debt, and employment history the lender will examine

Lenders look at your income to make sure your mortgage payment, property taxes, insurance, and homeowners association fees (if any) do not exceed 43 percent of your gross monthly income. This is called the debt-to-income ratio. If you earn $4,000 a month, your total housing payment cannot exceed about $1,720. Some lenders will go as high as 50 percent if you have strong credit or savings, but 43 percent is the standard.

Your lender will ask for recent pay stubs, W-2 forms from the past two years, and a signed offer letter from your employer stating your job title and salary. If you are self-employed, you will need two years of tax returns and possibly a profit-and-loss statement. If you receive income from Social Security, disability, alimony, or child support, bring documentation showing that income is stable and likely to continue.

The lender also wants to see that you have held your current job for at least two years, or that any job change was a promotion or move to the same field. A gap in employment or a switch to a lower-paying job can slow approval. If you have changed jobs recently, bring a letter from your new employer and your old employer explaining the reason for the move.

Beyond housing costs, the lender totals all your monthly debt payments — car loans, student loans, credit cards, personal loans, child support — and makes sure that plus your housing payment does not exceed 43 to 50 percent of gross income. High existing debt can disqualify you or limit how much you can borrow.

The FHA loan limits and how they affect your borrowing power

The FHA sets a maximum loan amount for each county in the United States. These limits change every year and vary widely. In rural or lower-cost areas, the limit might be $420,000. In expensive urban areas, it can reach $1,149,550 or higher. You cannot borrow more than your county's limit, even if a lender would offer it and even if you could afford the payment.

To find your county's FHA loan limit, visit the HUD website and search by state and county, or call an FHA-approved lender and ask. The limit applies to the loan amount, not the purchase price. If the home costs $300,000 and you put down 3.5 percent ($10,500), your loan is $289,500. That loan amount must fall within your county's limit.

If you want to buy a home that costs more than the FHA limit allows you to borrow, you would need to put down a larger down payment to bring the loan amount under the limit, or look for a less expensive property. Some lenders also offer jumbo FHA loans above the standard limit, but these are less common and may require a larger down payment or higher credit score.

Property requirements and the appraisal process

The FHA requires that the property you are buying meet certain safety and livability standards. It must have a functioning roof, heating system, plumbing, and electrical system. It cannot have lead paint hazards (for homes built before 1978), significant mold, or structural damage. The property must be a single-family home, a condo, a townhouse, or a multi-unit building with up to four units, and you must live in one of the units.

Before the lender approves your loan, an FHA-approved appraiser inspects the property and estimates its value. The appraisal costs $400 to $600 and is paid by you, usually at process. The appraiser checks that the property meets FHA standards and that its value supports the loan amount. If the appraisal comes in lower than the purchase price, you have three choices: renegotiate the price with the seller, put down more money, or walk away.

The property must also be in a flood zone that qualifies for FHA insurance. If it is in a high-risk flood zone, you will need separate flood insurance, which adds to your monthly payment. The lender orders a flood information report as part of the process, so you will know early whether this applies.

Steps from process to closing

Start by contacting FHA-approved lenders — banks, credit unions, and mortgage brokers all offer FHA loans. You can call several and ask about rates and fees. The lender will ask about your income, debts, credit, and the property you want to buy. If you do not have a property yet, some lenders will give you a pre-qualification letter showing how much you could borrow, which helps when making an offer.

Once you have a signed purchase agreement with a seller, you formally explore for the loan. The lender orders the appraisal, pulls your credit report, and requests documentation: pay stubs, tax returns, bank statements showing your down payment funds, and proof of employment. This stage takes about one to two weeks.

The lender then submits your file to underwriting, where a specialist reviews everything to make sure you meet FHA rules and the lender's own standards. Underwriting typically takes one to two weeks. The underwriter may ask for additional documents or explanations — for example, if you have a late payment on your credit report, they may ask you to explain what happened.

Once underwriting approves your loan, you receive a clear-to-close notice. You schedule a final walkthrough of the property, review your closing disclosure (a document showing all loan terms and costs), and sign papers at a title company or attorney's office. Closing takes one to three days. After closing, the lender funds the loan and the title transfers to you.

Costs you will pay beyond the down payment

FHA loans come with several costs built into the mortgage or paid at closing. The most significant is the upfront mortgage insurance premium (UFMIP), which is 1.75 percent of the loan amount. On a $289,500 loan, that is about $5,066. You can pay this at closing or roll it into the loan amount, which means you borrow it and pay interest on it over 30 years.

You also pay annual mortgage insurance, as mentioned earlier, which runs 0.55 to 1.80 percent of the loan amount per year depending on your down payment and loan size. This is divided into 12 monthly payments and added to your mortgage payment.

Beyond mortgage insurance, you pay standard closing costs: an appraisal fee ($400 to $600), a credit report fee ($20 to $50), title search and insurance ($500 to $1,500), attorney or title company fees ($300 to $1,000), and property taxes and homeowners insurance prorated to your closing date. Total closing costs typically range from $2,000 to $5,000, though this varies by location and lender.

The lender must provide a Loan Estimate within three business days of your process, showing all these costs. Review it carefully and compare estimates from multiple lenders, as rates and fees vary.

Frequently Asked Questions

Can I get an FHA loan if I have had a foreclosure or bankruptcy?

Yes, but there are waiting periods. After a foreclosure, you must wait three years before getting an FHA loan (two years if the foreclosure was due to a documented hardship like job loss or illness). After a Chapter 7 bankruptcy, the wait is two years from discharge. After a Chapter 13 bankruptcy, you can often borrow while still in the repayment plan if you have made 12 on-time payments and received court permission.

What if the home inspection finds problems?

A home inspection is separate from the FHA appraisal. You order and pay for the inspection yourself (typically $300 to $500). If it finds problems, you can ask the seller to fix them, offer a lower price, or ask the seller to credit you money at closing. The FHA appraisal checks only for major safety issues; the inspection is more detailed and is for your protection.

Can I use an FHA loan to buy a second home or investment property?

No. FHA loans are only for primary residences — homes you will live in as your main address. You cannot use an FHA loan for a vacation home, rental property, or investment. You must occupy the property within 60 days of closing.

What happens if I cannot afford the monthly payment after I close?

Contact your lender when ready. Many lenders offer loan modification programs that can lower your payment by extending the loan term, reducing the interest rate, or adding missed payments to the end of the loan. The sooner you reach out, the more options you have. Waiting until you miss payments damages your credit and limits your choices.

Do I need to be a first-time homebuyer to get an FHA loan?

No. While FHA loans are popular with first-time buyers because of the low down payment, anyone can use them. You do not need to have never owned a home before. The main requirement is that you will live in the home as your primary residence.