FHA Loans: What to Know in 2024 - NerdWallet (2024)

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.

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:

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.

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.

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.

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.

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.

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.

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 renovation loans

Other specialty FHA loans

FHA loan limits

No matter what type of FHA loan you're seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2024 range from $498,257 to $1,149,825.

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 2024 FHA loan limit is $816,500.You can visit HUD's website to look up the FHA loan limit in any county.

How to apply for an FHA loan

Applying for an FHA loan will require personal and financial documents, including but not limited to:

Your lender may be able to automatically retrieve some required documentation, like credit reports, tax returns and employment records. Special circ*mstances — such as 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

Disadvantages of FHA loans

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 feel 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.