FHA Loans: What to Know in 2024

An FHA loan is a mortgage insured by the Federal Housing Administration. FHA loans are helpful for buyers with limited savings or lower credit scores.
Abby Badach Doyle
By Abby Badach Doyle 
Updated
Edited by Alice Holbrook Reviewed by Michelle Blackford

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Nerdy takeaways
  • 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 lender).

An FHA home loan can be used to buy or refinance numerous types of homes, including:

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 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

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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.

🤓Nerdy Tip

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.

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 from 500 to 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.

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 from 500 to 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.

🤓Nerdy Tip

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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