FHA Loans: What to Know in 2023
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FHA loans allow down payments as low as 3.5% with a 580 FICO or 10% with a 500 FICO.
The federal government insures FHA loans, but the loans are issued by private lenders.
Mortgage insurance is required on all FHA loans, even if you put 20% down, but the amount and duration vary.
The home must undergo an FHA appraisal and meet government standards for health and safety.
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are often a good fit for first-time home buyers or people with little savings or credit challenges.
You could still qualify for an FHA loan even if you don’t meet the requirements for a conventional mortgage or if you had a bankruptcy.
The federal government doesn’t issue FHA loans, but it does insure them. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not qualify for a conventional home loan.
FHA loans are issued by private, FHA-approved lenders, including many banks, credit unions and nonbanks (a type of online lender).
An FHA home loan can be used to buy or refinance numerous types of homes, including:
Single-family houses.
Two- to four-unit multifamily homes.
Certain manufactured homes (attached to a permanent foundation).
Specific types of FHA loans can also be used to finance new construction or renovate an existing home. However, all properties — existing or new construction — must undergo an FHA appraisal. If the property meets government standards, then you can use an FHA loan to buy (or refinance) it.
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FHA vs. conventional loans
In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government.
Here are some key differences between FHA and conventional loans:
Credit score and history: FHA loans allow for lower credit scores than conventional loans. If you’ve had credit problems (including bankruptcy), you might find it easier to qualify for an FHA loan.
Mortgage insurance: Unlike conventional loans, all FHA loans require mortgage insurance. (However, the amount you pay varies based on the size of your down payment.) With a conventional loan, mortgage insurance generally isn't required if you make a 20% down payment or once you reach 20% equity in your home.
Gift funds for down payments: FHA rules are more flexible regarding the monetary gifts from family, employers or charitable organizations you can apply to your down payment.
FHA appraisal: To qualify for an FHA loan, the property must undergo an appraisal to make sure it meets government standards for health and safety. (An FHA appraisal is different, and separate, from a home inspection.) Conventional loans don’t require this.
Closing costs: FHA loans may involve closing costs that aren't required by conventional loans.
» MORE: Details on FHA vs. conventional loans
FHA loan requirements
The FHA sets minimum requirements for borrowers seeking an FHA loan. However, each FHA-approved lender can determine its own underwriting standards, so long as those requirements are in line with the minimums set by the FHA. For instance, one lender may require a minimum credit score of 600 and another a minimum of 620.
Lenders each set their own interest rates and fees, too. To make sure you get the best FHA mortgage rate and loan terms, shop more than one FHA-approved lender and compare offers.
In general, here are the basic requirements to expect when applying for an FHA loan.
» MORE: Detailed FHA loan requirements
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Credit score for FHA loans
According to the FHA, the minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can qualify for an FHA loan, but you'll need to make a down payment of at least 10%.
If your credit score is 580 or higher, you can qualify for a down payment as low as 3.5%.
Again, these are FHA guidelines — individual lenders can (and often do) opt to require a higher minimum credit score.
» MORE: Get your credit score for free
If your credit score doesn't measure up, you may want to work on building your credit before you begin home shopping. When you’re ready, find a lender that specializes in FHA loans. These lenders might be more experienced at working with credit-challenged borrowers.
» MORE: See top FHA loan lenders
Debt-to-income ratio
Your debt-to-income ratio, or DTI, is a measure of your monthly debt payments in relation to your pretax income. That includes your rent or mortgage costs in addition to things like auto or student loans and credit card balances. In general, lenders view a lower DTI as more favorable when issuing loans.
DTI requirements for FHA loans differ based on your credit score and other compensating factors, such as how much cash you have in the bank. If you have a credit score between 500 and 579, the FHA generally requires a DTI of less than 43%.
It’s still possible to get an FHA loan with a DTI that’s higher than 50%, but you’ll have to meet compensating factors, and your options will be limited.
» MORE: Calculate your DTI
Down payments and gift funds
The minimum down payment required for an FHA loan is 3.5% if you have a credit score of 580 or higher. If you have a credit score that's between 500 and 579, you'll have to put down at least 10% of the purchase price.
The good news? It doesn't all have to come from savings. You can use gift money for your FHA down payment, so long as the donor provides a letter with their contact information, their relationship to you, the amount of the gift and a statement that no repayment is expected.
Look into state and local down payment assistance programs for first-time home buyers (usually defined as someone who has not owned a home within the past three years). You may be able to find low- or no-interest loans, or even grants, to help you pull together the cash.
FHA appraisal
The property you're trying to buy with an FHA loan has to undergo an appraisal from an FHA-approved professional and meet FHA minimum property requirements.
The FHA appraisal is separate, and different, from a home inspection. The goal is to be sure the home is a good investment — in other words, worth what you're paying for it — and ensure it meets basic safety and livability standards.
For an FHA 203(k) renovation loan, the property may undergo two appraisals: an "as is" appraisal that assesses its current state and an "after improved" appraisal estimating the value once the work is completed.
» MORE: What's included in an FHA appraisal
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Mortgage insurance
FHA mortgage insurance is built into every loan. When you first get an FHA mortgage, you'll make an upfront mortgage insurance payment (which can be rolled into the total amount of the loan). Then, you make monthly mortgage insurance payments thereafter. The length of your monthly payments varies based on the size of your down payment.
If your down payment is less than 10%: You will pay FHA mortgage insurance for the life of the loan.
If your down payment is 10% or more: You will pay FHA mortgage insurance for 11 years.
With a conventional loan, you can cancel private mortgage insurance once you reach 20% equity in your home. FHA mortgage insurance can’t be canceled in the same way.
Once you have enough home equity, you could choose to refinance your FHA loan into a conventional loan. This would remove the FHA mortgage insurance requirement, but you’d have to meet new qualifications and pay additional closing costs and fees.
Types of FHA loans
The FHA offers a variety of loan options, from standard purchase loans to products designed to meet highly specific needs. A full list of all FHA loan products (and eligibility requirements) is available at HUD.gov. Here are some common options:
Home purchase: Basic Home Mortgage 203(b)
The Basic Home Mortgage 203(b) is the standard single-family home loan backed by the FHA. Only primary residences — not vacation or second homes — qualify for FHA-insured loans.
FHA refinance loans
You may want to refinance your FHA loan to lower your interest rate, shorten your mortgage term or get cash flow for a costly project (such as a home renovation). Options include:
FHA rate and term refinance: This option can help lower your interest rate or shorten the length of the loan.
FHA streamline refinance: This can save you time and paperwork because it doesn’t require a new appraisal.
FHA cash-out refinance: This loan replaces your current mortgage with a new, larger loan. The difference is paid to you in cash.
FHA 203(k) refinance: This loan lets you roll the cost of repairs or renovations into the total amount of your mortgage. Upgrades must meet FHA eligibility requirements.
» MORE: FHA refinance loan options
FHA renovation loans
FHA 203(k) rehabilitation mortgages: This option helps borrowers finance fixer-uppers by rolling purchase and renovation costs into one loan. The standard 203(k) loan lets borrowers finance improvements over $5,000. The FHA limited 203(k) loan lets borrowers finance improvements up to $35,000.
Title 1 Property Improvement Loans: These loans are also available to finance home repairs and improvements. Homeowners can obtain this loan without refinancing their existing mortgage, and the funds can be used to supplement a 203(k) loan. However, you can borrow only up to $25,000 for a single-family home.
Other specialty FHA loans
Energy-efficient mortgages: An energy-efficient mortgage can be used to finance home improvements to help a home save energy. To qualify for this financing, the home must undergo an energy assessment from a qualified professional.
Construction-to-permanent loans: This loan type helps borrowers finance the purchase of a home that’s still being built by paying the contractor in installments. When the home is finished, the loan converts to a permanent mortgage. Qualifying for these types of loans can be more difficult and time-consuming than a traditional purchase mortgage.
Manufactured homes: This includes the type sometimes called a “mobile home.” Manufactured homes can be bought with FHA financing, so long as everything meets HUD requirements. For example, HUD mandates that a manufactured home is at least 400 square feet, and it must be designed to use as a dwelling attached to a permanent foundation.
FHA loan limits
No matter which type of FHA loan you're seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2023 range from $472,030 to $1,089,300.
Low-cost county limit: The upper limit for FHA loans on single-family homes in low-cost counties is $472,030. An example is Lucas County, Ohio, where Toledo is located.
High-cost county limit: The upper limit for FHA loans in the highest-cost counties is $1,089,300 — which would include mortgages in San Francisco County, California, for example.
Some counties have housing prices that fall somewhere in between, so the FHA loan limits are in the middle, too. An example is Denver County, Colorado, where the 2023 FHA loan limit is $787,750. You can visit HUD's website to look up the FHA loan limit in any county.
» MORE: See how much home you can afford
How to apply for an FHA loan
Applying for an FHA loan will require personal and financial documents, including but not limited to:
A valid Social Security number.
Proof of U.S. citizenship, legal permanent residency or certain eligible work statuses.
Bank statements for, at a minimum, the past 30 days. You'll also need to provide documentation for deposits made during that time (such as pay stubs).
Your lender may be able to automatically retrieve some required documentation, like credit reports, tax returns and employment records. Special circumstances — like if you're a student or you don't have a credit score — may require additional paperwork.
Pros and cons of FHA loans
An FHA loan might be your best option for homebuying if you have credit challenges. Still, it’s important to understand the trade-offs.
Benefits of FHA loans
Lower minimum credit score requirements than conventional loans.
Down payments as low as 3.5%.
Debt-to-income ratios as high as 50% allowed (in some cases, may be higher if you meet compensating factors).
Disadvantages of FHA loans
FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.
Property must undergo a separate appraisal and meet strict health and safety standards, which some sellers will consider an added hurdle.
No jumbo loans: The loan amount cannot exceed the conforming limit for the area.
Though the FHA sets standard requirements, FHA-approved lenders' requirements may be different.
FHA interest rates and fees also vary by lender, so it's important to comparison shop. Getting a mortgage preapproval from more than one lender can help you compare the total cost of the loan.
Ways to get the best FHA mortgage rates
When you’re shopping for an FHA loan, it’s smart to make sure your financials are in as good a shape as possible. This means pulling your credit reports from the three main credit reporting agencies — Experian, Equifax and TransUnion — and addressing any errors you might find. If possible, you might also pay down any larger balances, which has the added benefit of improving your debt-to-income ratio. While FHA loans might have more lenient requirements than some other loan types, having a better credit score and DTI will likely net you a better rate.
FHA loans are notable for requiring low down payments, but if you’re able to make one that’s higher than the minimum, you’ll look like a safer candidate to lenders. This is also likely to get you lower rate offers.
Once you’re feeling confident about your application, compare mortgage rates between at least three FHA lenders. Even small differences in the rate you pay could save you — or cost you — thousands of dollars over the term of a home loan. And while you’re comparing lenders, look into first-time home buyer programs offered by your state’s housing authority. Many of these nonprofit agencies offer down payment and closing cost assistance in the form of grants.
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