What Is An FHA Loan?

The FHA loan, backed by the Federal Housing Administration, is the original low-down payment mortgage for first-time home buyers. It’s an inclusive mortgage program that makes homeownership accessible and more affordable.

A Longer Definition: FHA Mortgage

FHA mortgages are mortgage loans insurance by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD).

The FHA was founded as an insurance agency in the National Housing Act of 1934. It offered mortgage default insurance to banks so banks would agree to make loans in their communities.

90 years later, the FHA fills the same role.

The group publishes a set of rules called mortgage guidelines. Any mortgage loan that meets FHA guidelines is eligible for approval.

The most well-known FHA guideline is its low down payment requirement, which is a 3.5 percent minimum down payment. The FHA also enforces less stringent credit requirements compared to other government-backed mortgages.

887,234 people used FHA mortgages to buy a home last year. Other FHA mortgage statistics include:

• The FHA mortgage market share was 17.97%
• The average FHA loan size was $279,773
• 69.51% of FHA home buyers had a credit score below 680

FHA mortgages are available as 30-year fixed-rate, 15-year fixed-rate, or adjustable-rate mortgages. They also strictly adhere to FHA mortgage loan limits.

The current FHA loan limit for single-family homes, including detached homes, townhomes, and condos, is $498,257 and ranges up to $1,149,825 in high-cost areas of the country.

There is no prepayment penalty for paying an FHA loan ahead of schedule and FHA loans are assumable mortgages, which means that when a buyer sells their home, the new owner can use the same FHA mortgage at the same mortgage interest rate.

Who Qualifies for an FHA Loan?

To qualify for an FHA-insured loan, first-time home buyers and their homes must meet FHA eligibility standards, summarized here:

• Home buyers must make a down payment of at least 3.5 percent
• Home buyers must have verifiable income
• Home buyers may not be delinquent on federal taxes or federal student loans
• Home buyers may not own another FHA-financed home
• Homes must be free from lead paint and other habitability standards
• Homes must be a residential property with 1-4 units

The FHA doesn’t enforce a minimum credit score and makes special provisions for buyers without credit history or credit score.

Buyers don’t need social security numbers, either. Non-permanent resident aliens can use FHA mortgages, as can employees of the World Bank and foreign embassies.

FHA mortgage guidelines are less rigorous than other government-backed mortgage programs, making them ideal loans for first-time buyers.

If you’ve been turned down for another loan type, an FHA-backed mortgage could help you stop renting and start owning: FHA mortgages are the original first-time home buyer program.

6 Popular FHA Mortgage Programs

The FHA backs purchases and refinances for eligible U.S. households. Since insuring its first mortgage in 1933, the agency has built a menu of six different loan types. Each loan type solves a specific home buyer’s need.

1. FHA 203b Loan: Best For Buying A Home

FHA 203b loan is the official government name for the standard FHA-backed mortgage. 203b loans rarely get called by their proper name. Mortgage lenders, real estate agents, and everyone else calls them “FHA loans.”

The FHA 203b loan is the default mortgage option for FHA-backed buyers. It allows for a 3.5 percent down payment, flexible mortgage guidelines, and a low minimum credit score.

2. FHA 203k Renovation Loan: Best For Buying A Home That Needs Repairs

The FHA’s 203(k) renovation loan is a dual purchase + home improvement loan. It combines mortgage and home renovation costs into a 30-year fixed-rate mortgage with a single monthly payment.

The FHA 203(k) makes home repairs and construction more affordable for FHA-backed borrowers. The program is excellent for:

• Energy-efficiency improvements, including solar installation
• Repairing plumbing and electric systems
• Repairing or replacing a roof or gutters and downspouts
• Replacing damaged floors
• Improving landscaping and curb appeal

The FHA 203(k) removes health and safety hazards for ADA compliance.

3. HUD Homes Program: Best For Buying A Foreclosed Home

The FHA is a sub-agency within the U.S. Department of Housing and Urban Development (HUD). In 1968, HUD established a program to sell homes it acquired through foreclosure. The program, known as HUD Homes, sells foreclosed residential properties to the public at steep discounts. 

Down payment requirements vary for buyers of HUD-owned homes. Some require the standard 3.5 percent of an FHA loan. Others allow down payments as low as $100.

4. Good Neighbor Next Door: Best For Public Service Professionals 

Firefighters, educators, law enforcement officials, and EMTs can purchase HUD homes in low- and moderate-income areas at 50% off their list price through the Good Neighbor Next Door program. 

Buyers are required to live in their homes for at least three years, except for members of the military who receive clemency for time spent on active duty.

5. The FHA Streamline Refinance: Best For Refinancing Without Paperwork

The FHA Streamline Refinance is the most straightforward, fastest mortgage refinance available to FHA-backed homeowners. 

It doesn’t require any of the typical verifications associated with mortgage lending:

• No employment verification
• No income verification
• No asset verification
• No credit score check
• No home appraisal

To be eligible for the FHA Streamline Refinance, homeowners must show:

• 6-month history of on-time payments 
• Proof that the new FHA mortgage will lower their monthly payments by five percent.

The FHA Streamline Refinance is a low-risk loan because it reduces the monthly payment for borrowers who already make on-time payments. In general, the default rate on FHA Streamline Refinances is lower than for FHA loans.

Before qualifying, you must have already completed at least six monthly payments on your existing loan.

6. FHA Cash-Out Refinance: Best For Refinancing To Get Cash 

The FHA cash-out refinance lets homeowners replace their current mortgage with a larger one to convert home equity into spendable cash. 

The FHA cash-out guidelines limit mortgage loan sizes to 80% of a home’s appraised value. Loan sizes must remain within local FHA loan limits. Homeowners may not cash out their refinance within the first 12 months of occupying a home.

Bonus: The LIFT Act: Best For First-Time Home Buyers 

The LIFT Act is a congressional bill that uses FHA mortgages to help renters buy their first home. 

The LIFT Act changes how mortgage payments are structured. Each payment contains more principal than usual, which reduces a homeowner’s balance more quickly. The LIFT Act targets first-time home buyers with FHA-eligible credit scores and low to moderate-income levels.

The LIFT Act has not yet been passed into law, but when it is, home buyers can use it with other first-time home buyer programs like the First-Time Home Buyer Tax Credit and the Downpayment Toward Equity Act. 

What Is FHA Mortgage Insurance Premium (MIP)?

FHA mortgage insurance is a specific type of insurance, mandatory with FHA loans. When a home buyer uses an FHA loan, they must also pay for mortgage insurance.

FHA mortgage insurance is paid in two parts.

1. Upfront Mortgage Insurance Premium (UFMIP)
2. Annual Mortgage Insurance Premium (MIP)

The FHA mortgage insurance schedule changes periodically. The current schedule was established in March 2023. It includes upfront mortgage insurance equal to 1.75 percent of the loan amount, and annual MIP rates that vary by down payment, loan size, and loan length.

The FHA automatically adds upfront MIP to a buyer’s loan balance. It collects 1/12 of the annual mortgage insurance monthly within the buyer’s mortgage payment.

30-Year FHA mortgage with a 3.5 percent down payment

• 0.55 percent MIP per year, or $550 per $100,000 borrowed
• For loan sizes over $726,200, add 0.20 percentage points
• Paid monthly until the loan is paid-in-full or refinanced

30-Year FHA mortgage with a 5 percent down payment

• 0.50 percent MIP per year, or $500 per $100,000 borrowed
• For loan sizes over $726,200, add 0.20 percentage points
• Paid monthly until the loan is paid-in-full or refinanced

30-Year FHA mortgage with a 10 percent down payment

• 0.50 percent MIP per year, or $500 per $100,000 borrowed
• For loan sizes over $726,200, add 0.20 percentage points
• Paid monthly until 132 payments are made, or the loan is refinanced

15-Year FHA mortgage with 10 percent down payment or less

• 0.40 percent MIP per year, or $400 per $100,000 borrowed
• For loan sizes over $726,200, add 0.25 percentage points
• Paid monthly until the loan is paid-in-full or refinanced

15-Year FHA mortgage with more than 10 percent down payment

• 0.15 percent MIP per year, or $150 per $100,000 borrowed
• For loan sizes over $726,200, add 0.25 percentage points
• Paid monthly until 132 payments are made, or the loan is refinanced

15-Year FHA mortgage with more than 22 percent down payment

• 0.15 percent MIP per year, or $150 per $100,000 borrowed
• For loan sizes over $726,200, no adjustment required
• Paid monthly until 132 payments are made, or the loan is refinanced

FHA mortgage insurance premiums differ for FHA refinances, including the FHA Streamline Refinance, and Hawaiian Home Lands and Indian Lands loans.

FHA Mortgage Insurance Premium Changes Since 2008

The FHA periodically reviews and adjusts its mortgage insurance premium rates to achieve balance between promoting affordable homeownership and protecting its member mortgage companies.

When FHA MIP changes, it’s a reflection of the current housing market, economic environment, and health of the agency’s Mutual Mortgage Insurance Fund (MMIF), which is the cash reserves from which the FHA pays insurance claims.

Housing Market Conditions

The overall health of the housing market, including home prices and foreclosure rates, plays the largest role in the FHA’s decision to change prices. The FHA might reduce MIP rates in a strong housing market because default risks are lower. Conversely, it might increase rates in a struggling market to accumulate more reserves.

Economic Conditions

Changes in the U.S. economy, such as changes in unemployment rates, inflation, and consumer spending, influence FHA MIP policy. Making adjustments linked to macro- and micro-forces on the economy helps the FHA better manage its loan default risk.

The Health of the Mutual Mortgage Insurance Fund

The FHA must keep a cash balance of at least 2 percent of its outstanding loan balances in its Mutual Mortgage Insurance Fund (MMIF), a cash reserve from which the FHA pays claims.

When there’s a forecasted increase in loan default rates, the FHA may raise premiums on new FHA home buyers to protect FHA lenders and stabilize the housing market. Conversely, a forecasted decrease or sustained strong performance can result in an FHA MIP reduction.

MIP Change Date	Annual MIP	Upfront MIP
October 2008	0.55%	1.75%
April 2010	0.55%	2.25%
October 2010	0.90%	1.00%
April 2011	1.15%	1.00%
April 2012	1.25%	1.75%
April 2013	1.35%	1.75%
January 2015	0.85%	1.75%
March 2023	0.55%	1.75%

Source: FHA, https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee
Assumptions: 30-year fixed-rate FHA mortgage, 3.5% downpayment up to FHA mortgage loan limit

Comparing FHA Loans vs. Conventional Loans

Conventional home loans are loans backed by one of two other government mortgage agencies, Fannie Mae and Freddie Mac. 

Conventional mortgages differ from FHA loans because the government does not insure them. Conventional mortgages are backed by Wall Street and adhere to the most general of mortgage standards, so it’s no surprise that 82% of home buyers use conventional mortgage financing.

Conventional mortgage loans allow for more fixed-rate mortgage terms than FHA or USDA loans. They also allow more adjustable-rate mortgage terms. Home buyers can choose a 10-, 15-, 20, or 30-year fixed-rate mortgage; or a 3-, 5-, 7-, or 10-year adjustable-rate term.

There are also multiple three-percent down, low down payment mortgages available through conventional mortgage financing:

1. Conventional 97
2. The HomeReady Mortgage
3. The Home Possible Mortgage

Here’s a comparison:

FHA Loan	Conventional Loan
3.5 percent down payment	3 percent down payment
No credit score minimum	Minimum credit score threshold
Mortgage insurance mandatory	Mortgage insurance requirements based on equity percentage
$498,257 loan limit	$766,550 loan limit
Primary residence only	Primary, second, and non-owner occupancy allowed

What’s the Difference Between FHA vs. USDA Loans?

Since its start in 1934, the FHA program has supported affordable homeownership. The success of the FHA led to the creation of another government-backed mortgage program: the USDA loan.

USDA loans are mortgage loans backed by the U.S. Department of Agriculture to promote home affordability in suburban and rural census tracts.

USDA loans are 100% mortgages that require no down payment.s compared to FHA mortgage guidelines, USDA guidelines are more restrictive.

• USDA loans require a 580 credit score or higher
• USDA loans are limited to single-family homes
• USDA loans impose maximum income limits on homeowners

Additionally, USDA loans are only available to home buyers in low-density census tracts, as defined in this USDA eligibility map. 91% of the United States is USDA mortgage-eligible.

Here is a more detailed look at the differences between FHA loans and USDA loans:

FHA Loan	USDA Loan
Homes everywhere	Homes in less-dense areas
3.5 percent down payment	No down payment required
No credit score minimum	Low credit score minimum
No income limitations	Moderate income limitations
$498,257 loan limit	No maximum loan size

Learn more about USDA loans.

Common Questions About FHA Loans

Are FHA loans available in all 50 states?

Yes, FHA loans are available in all 50 states.

Can I use a cash gift as a down payment with an FHA loan?

Yes. The FHA is the only government agency allowing a home buyer’s entire down payment to come as a gift. It’s also the only agency that lets cash gifts come from a friend. Some home buyers add down payment cash to their wedding and baby shower registries.

Are FHA mortgages assumable?

Yes, FHA mortgages are assumable, which means that your home’s future buyer can purchase your mortgage from you along with your home too. Assumable mortgages make your home more affordable to others after mortgage rates rise. You can sell your 4% mortgage rate in a 10% mortgage rate market.  

Can I refinance an FHA mortgage?

Yes. FHA-backed homeowners get access to the FHA Streamline Refinance. When mortgage rates are down, homeowners can switch to lower-rate mortgages irrespective of their work status, money in the bank, or credit score. Home appraisals aren’t required.

Do I need a larger down payment when using an FHA for a multi-unit property?

No. FHA mortgages don’t require home buyers to make a larger down payment or accept a higher interest rate when buying a multi-unit home. FHA mortgages allow 3.5 percent down regardless of property type. 

Can I negotiate closing costs with home sellers?

Yes, the FHA allows home buyers to negotiate with home sellers to contribute up to 6 percent of the purchase price toward closing costs, or $6,000 per $100,000. These contributions are known as seller concessions and can be applied to any costs on a settlement statement.

What is the minimum down payment on an FHA loan?

FHA loans require that buyers make a down payment of at least 3.5 percent against the purchase price, or $3,500 for every $100,000. There is no maximum down payment amount.

What is the minimum credit score for an FHA loan?

FHA loans require most buyers to have a credit score of 580 or higher, but borrowers with scores between 500-579 may still be eligible with a down payment of 10 percent or more.