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FHA Loans Explained: Who They Help and How They Work
An FHA loan is a mortgage insured by the Federal Housing Administration. That insurance lets lenders approve buyers with smaller down payments and less-than-perfect credit, which is why FHA loans are one of the most common ways people buy their first home. Here is how they work, who qualifies and what they cost.
How an FHA loan works
You don’t borrow from the FHA. You borrow from an FHA-approved lender, and the FHA insures the loan. If a borrower stops paying, that insurance repays the lender for its loss. The protection is what makes FHA’s more flexible credit and down payment rules possible.
The FHA was created by the National Housing Act of 1934 to open home ownership to more Americans. Today it is part of the U.S. Department of Housing and Urban Development (HUD). Borrowers pay for the insurance through mortgage insurance premiums, explained below.
Who qualifies
FHA sets the minimum standards. Lenders apply them, and can add stricter requirements of their own.
| Credit score | FHA minimum down payment |
|---|---|
| 580 or higher | 3.5% of the purchase price |
| 500 to 579 | 10% of the purchase price |
| Below 500 | Not eligible for FHA financing |
Patriot works with credit scores down to FHA’s floor of 500. Patriot’s credit minimums are subject to change. Keep the down payment in mind, though: below 580, FHA requires at least 10% down instead of 3.5%. If your score is close to 580, a loan officer can tell you whether a few changes before you apply could lower the down payment you need.
You will also need:
- To live in the home. FHA loans are for your primary residence, not vacation homes or rentals. You can buy a two- to four-unit property if you live in one of the units.
- Steady, documented income. Your lender will verify your income and work history.
- Debts you can manage. Your lender compares your monthly debt payments to your income. FHA allows more room here than many conventional loans when the rest of your application is strong.
- A home that passes an FHA appraisal. The appraisal checks the home’s value and its basic safety, soundness and security.
You don’t have to be a first-time buyer. FHA loans are open to anyone who meets the requirements, though you can generally have only one FHA loan at a time.
Your down payment, and where it can come from
FHA lets your entire down payment come from a gift: a family member, your employer, or an approved down payment assistance program. The gift has to be documented, and your loan officer will tell you exactly what paperwork the giver needs to provide.
Patriot works with state housing agency down payment programs in several states. Your loan officer can tell you which programs are available in your state.
What mortgage insurance costs
Every FHA loan carries mortgage insurance, however much you put down. It has two parts:
- An upfront premium, a one-time charge based on your loan amount. Most borrowers add it to the loan instead of paying it at closing.
- An annual premium, divided into your monthly payments.
How long you pay the annual premium depends on your down payment:
| Down payment | How long the annual premium lasts |
|---|---|
| Less than 10% | The life of the loan |
| 10% or more | 11 years |
HUD sets the premium rates and changes them from time to time. The rates in effect today are in HUD Mortgagee Letter 2023-05, and your exact cost will appear on your Loan Estimate.
Because the annual premium can last for the life of the loan, many FHA borrowers later refinance into a conventional loan once they have enough equity to drop mortgage insurance.
How much you can borrow
FHA loan limits are set county by county, so the most you can borrow depends on where you buy. The limits update every January; look up your county with HUD’s FHA mortgage limits tool. Within that limit, what you qualify for depends on your income, debts, credit and the home’s appraised value.
Which homes qualify
- Single-family homes
- Two- to four-unit properties, if you live in one of the units
- Condos in FHA-approved projects
- Some manufactured homes that meet FHA standards
The FHA appraisal checks value along with basic health and safety items. If it finds something that has to be fixed, the repair usually happens before closing.
FHA or conventional?
The Consumer Financial Protection Bureau notes that FHA loans can often be the cheapest option for borrowers with lower credit scores or smaller down payments. With good credit and 10 to 15% down, a conventional loan often costs less, largely because its mortgage insurance can be removed. There is no hard rule, so it’s worth comparing both, and a loan officer can price both for you side by side.
Common questions
Can a seller turn down an FHA offer?
Yes. No law requires a seller to accept FHA financing. A full pre-approval and a clean offer make yours easier to say yes to.
Are closing costs higher on an FHA loan?
They are generally similar to other loans, apart from the upfront mortgage insurance premium, which most buyers add to the loan. FHA also lets sellers pay part of your closing costs, within HUD’s limits.
Can I use an FHA loan more than once?
Yes. You can generally hold one FHA loan at a time, and once it is paid off or the home is sold, you can use FHA again.
Can I get rid of FHA mortgage insurance?
If you put 10% or more down, the annual premium ends after 11 years. With less down it lasts for the life of the loan, and the usual way to remove it is to refinance into a conventional loan.
Does FHA offer other programs?
Yes. FHA also insures renovation loans (known as 203(k)), streamlined refinances for people who already have an FHA loan, and reverse mortgages for homeowners 62 and older. A loan officer can tell you which fit your plans.
Talk to a Patriot loan officer
Every situation is different, and a short conversation is the quickest way to know what fits yours.
This article is general information, not an offer to lend or a commitment to lend. All loans are subject to credit approval, underwriting and property valuation. Belem Servicing LLC, NMLS ID #715386 (NMLS Consumer Access).
Sources
- Consumer Financial Protection Bureau, FHA loans
- U.S. Department of Housing and Urban Development, Mortgagee Letter 2023-05: annual mortgage insurance premium rates
- U.S. Department of Housing and Urban Development, FHA mortgage limits lookup
- U.S. Department of Housing and Urban Development, Single Family Housing Policy Handbook 4000.1 (credit score and down payment rules)