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An FHA loan is a mortgage insured by the Federal Housing Administration. FHA loans require a smaller down payment, have lower closing costs and allow relaxed lending standards to help homeowners who don’t qualify for a conventional mortgage.

FHA loans allow a down payment of as little as 3.5% on a mortgage. This can make it possible for lower- and middle-income borrowers to buy a house when they don’t qualify for a conventional loan — which has stricter requirements, including a higher credit score and bigger down payment.

Who qualifies?

FHA loans require a FICO credit score of 500 or better. However, to qualify for the low 3.5% down payment, you’ll need a credit score of at least 580, according to a Department of Housing and Urban Development official. If your credit score is between 500 and 579, you’ll need to put 10% down. You’ll also need to get your total debt-to-income ratio — including the new mortgage, credit cards, student loans and any other monthly obligations — to 50% or less.

You also must:

  • Have a minimum of two established credit accounts; examples include a credit card and a car loan.
  • Have no delinquent federal debt or judgments — tax-related or otherwise — or debt associated with past FHA-insured mortgages
  • Account for cash gifts that help with the down payment. These gifts must be written down, signed and dated by the donor.

What are FHA loan limits?

FHA loan limits vary depending on location and property type (such as a single-family home or duplex), and are calculated as 115% of a county’s median home price. You can find the limit for your area by using this tool.

See the video below for more details on the requirements of an FHA loan.

Will I need mortgage insurance?

If you take out an FHA loan, you’ll have to get mortgage insurance. “Mortgages backed by the FHA require a 1.75% upfront mortgage insurance payment as well as monthly mortgage insurance premiums ranging from 0.45% to 1.05%, depending on the loan term and amount (premium rates as of January 2017). PMI on FHA loans cannot be canceled for the life of the loan.