What Is an FHA Loan and Who Qualifies for One?

An FHA loan is a mortgage insured by the Federal Housing Administration. Because the government backstops the lender's risk, lenders can offer these loans to buyers who wouldn't qualify for a conventional mortgage — people with lower credit scores, smaller down payments, or higher debt-to-income ratios. FHA loans opened homeownership to millions of first-time buyers, but they come with costs that conventional loans don't.

FHA Loan Requirements

• Credit score 580+: Minimum 3.5% down payment.
• Credit score 500–579: Minimum 10% down payment.
• Credit score below 500: Not eligible for FHA financing.
• Debt-to-income (DTI) ratio: Typically up to 43%, sometimes 50% with compensating factors.
• Primary residence only: FHA loans cannot be used for investment properties or vacation homes.
• Property must meet FHA minimum property standards (condition requirements).
• Loan limits vary by county: In 2024, the baseline limit is $498,257 (higher in high-cost areas).

FHA Mortgage Insurance Premium (MIP)

The major cost of FHA loans is mortgage insurance. Unlike conventional PMI which can be canceled, FHA MIP is required for the life of the loan if you put less than 10% down. There are two components: an upfront MIP of 1.75% of the loan amount (paid at closing or rolled into the loan), and an annual MIP of 0.55%–1.05% of the loan amount depending on term and LTV, paid monthly.

FHA vs. Conventional Loan

• Down payment: FHA allows 3.5% (at 580+); conventional allows 3% but requires higher credit.
• Credit score: FHA more flexible; conventional typically requires 620+ for best terms.
• Mortgage insurance: FHA MIP is often for life of loan; conventional PMI cancels at 20% equity.
• Loan limits: Conventional has higher loan limits in most areas.
• Property condition: FHA has stricter property standards than conventional.
• Interest rates: FHA rates are often similar to or slightly lower than conventional, but MIP adds effective cost.

When an FHA Loan Makes Sense

• Credit score between 580–679 where conventional rates would be much higher.
• Limited savings — you need the lowest possible down payment.
• You plan to refinance into a conventional loan once you've built equity (typically 20%) to eliminate MIP.
• High DTI situation where conventional lenders won't approve but FHA will.

How to Get Rid of FHA MIP

If you put 10% or more down on an FHA loan, MIP cancels after 11 years. With less than 10% down, the only way to eliminate MIP is to refinance into a conventional loan once you reach 20% equity. Given that FHA MIP adds roughly 0.55–1.05% annually to your effective rate, refinancing when eligible is usually worthwhile — typically once you've been in the home 3–5 years and values have risen.