What is an FHA Loan and How Do You Apply?
Trying to figure out what an FHA loan actually is?
It’s a mortgage proposed by a well-known organization namely, Federal Housing Administration. FHA is popular among borrowers because it lets you easily qualify for the loan even with a low credit score.
Are you dreaming of buying your first home but worried about your credit score or saving enough for a down payment? An FHA loan might be the perfect solution for you.
What Is an FHA Loan?
An FHA loan is a mortgage backed by the Federal Housing Administration. These loans are designed to help people with lower credit scores and limited savings become homeowners. Unlike conventional loans that have stricter requirements, FHA loans make homeownership accessible to more Americans.
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FHA Loans vs. Conventional Loans: What’s the Difference?
Understanding the key differences between FHA and conventional loans can help you decide which is right for your situation:
Credit Score Requirements
With an FHA loan, you can qualify with a credit score as low as:
- 500-579: You’ll need a 10% down payment
- 580 or higher: You can put down as little as 3.5%
Conventional loans typically require a credit score of at least 620 and down payments between 3-20%.
For those struggling with credit issues, you might want to check out our guide on how credit scores impact housing assistance. Improving your score even slightly could save you thousands over the life of your loan.
Debt-to-Income (DTI) Ratios
Your debt-to-income ratio must be under 50% to qualify for an FHA loan. This means your monthly debt payments (including your future mortgage) should not exceed half of your monthly income. Conventional loans sometimes allow higher DTI ratios but with stricter overall qualifying criteria.
According to the Consumer Financial Protection Bureau, maintaining a lower DTI ratio not only helps you qualify for loans but also ensures you don’t become house-poor after purchasing your home.
Mortgage Insurance
FHA loans require two types of mortgage insurance:
- Upfront Mortgage Insurance Premium (UFMIP): 1.75% of your loan amount, usually added to your loan
- Annual Mortgage Insurance Premium (MIP): 0.55-1.05% of your loan amount per year, paid monthly
With conventional loans, you only need to pay for private mortgage insurance (PMI) if your down payment is less than 20%, and you can cancel it once you reach 20% equity.
The Department of Housing and Urban Development (HUD) notes that these insurance premiums help keep FHA loans accessible to those who might not otherwise qualify for home financing.
Property Requirements
FHA loans are only for primary residences – you must plan to live in the home. The property must also pass an FHA appraisal, which is more stringent than conventional appraisals to ensure the home meets safety and livability standards.
Conventional loans can be used for primary homes, second homes, or investment properties. If you’re interested in different housing options, our article on 10 common types of housing in the U.S. can help you understand what might work best for your needs.
Types of FHA Loans
The FHA offers several loan programs to meet different homebuyer needs:
Basic Home Mortgage (203(b))
This is the standard FHA loan for purchasing or refinancing a primary residence. It works for single-family homes and properties with up to four units, as long as you plan to live in one of the units.
203(k) Rehabilitation Loan
This unique program allows you to finance both the purchase and renovation of a home with a single loan. It’s perfect if you’re eyeing a fixer-upper or want to make improvements to a home before moving in.
The National Association of Realtors reports that 203(k) loans have become increasingly popular as housing inventory tightens and more buyers consider older homes that need updating.
Home Equity Conversion Mortgage (HECM)
This reverse mortgage program is designed for homeowners aged 62 and older. It allows seniors to convert home equity into cash while still living in and owning their homes.
If you’re a senior looking at housing options, you might also be interested in our guide to seniors applying for Housing Choice Vouchers.
Energy Efficient Mortgage (EEM)
This program helps finance energy-efficient improvements to your home, potentially lowering utility bills. The savings from reduced energy costs can help offset the slightly higher mortgage payment.
For more ways to save on housing-related expenses, check out our article on energy assistance for low-income households.
Section 245(a) Loan (Graduated Payment Mortgage)
If you expect your income to increase over time, this loan starts with lower monthly payments that gradually increase. It’s designed for borrowers with good future income prospects but limited current resources.
How to Qualify for an FHA Loan
To qualify for an FHA loan, you’ll need to meet these basic requirements:
Steady Income
You must have verifiable income that can be documented through tax returns, pay stubs, or other official records. Lenders typically want to see a two-year employment history.
According to Freddie Mac research, consistent income is the strongest predictor of mortgage success, even more so than credit score for many borrowers.
Affordable Housing Payment
Your mortgage payment should not exceed 31% of your gross monthly income, though some lenders may go up to 35%. Your total debt payments (including your mortgage) should be less than 43% of your income, though some lenders allow up to 50% for strong applicants.
Down Payment Funds
You need at least 3.5% of the purchase price for a down payment (with a 580+ credit score). However, one of the great benefits of FHA loans is that this money can come from:
- Your savings
- A gift from family
- Assistance programs for first-time homebuyers
If you’re struggling to save for a down payment, you might want to explore what housing grants are available to help with this initial hurdle.
Credit Requirements
While FHA minimum requirements allow for credit scores as low as 500, most lenders set their minimum around 580-620. Besides your score, lenders will look at your overall credit history, including:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
How to Apply for an FHA Loan
The application process for an FHA loan involves several steps:
- Get pre-approved: This helps you understand how much house you can afford before shopping.
- Find an FHA-approved lender: Not all mortgage lenders offer FHA loans.
- Complete a loan application: Be prepared to provide documentation about your income, assets, and debts.
- Provide required documents, which typically include:
- Proof of U.S. citizenship or permanent residency
- Social Security Number
- Two years of tax returns
- Recent pay stubs
- Bank statements
- Employment verification
Top FHA Lenders in 2025
While many lenders offer FHA loans, these consistently rank among the best based on customer satisfaction, rates, and approval times according to CNBC:
| Lender | Best For | Min. Credit Score | Min. Down Payment | Loan Types | Standout Benefits |
| Chase Bank | In-person experience | 620 (500 for FHA) | 3.5% (3% for DreaMaker) | Conventional, FHA, VA, Jumbo, DreaMaker | $7,500 Homebuyer Grant, $5,000 closing guarantee, 4,700+ branches |
| Pennymac | Low interest rates | 580 (FHA), 620 (others) | 3.5% (FHA) | Conventional, FHA, VA, Jumbo | $1,000 closing cost credit, up to $9,500 rebate via Home Connect, Lock & Shop rate hold |
| New American Funding | Minority borrowers | 500 (FHA), 620 (conv.) | 3.5% (FHA) | Conventional, FHA, VA, USDA, Jumbo, HELOC, Reverse | Black Impact & Latino Focus initiatives, 14-day closing guarantee, “I Can” custom loan terms |
| Rocket Mortgage | Customer satisfaction | 500 (FHA), 620 (conv.) | 3.5% (FHA) | Conventional, FHA, VA, Jumbo, Rocket ONE+, HomeReady, Home Possible | 1% down payment (Rocket ONE+), $10,000 rebate, high satisfaction scores |
| Guild Mortgage | No down payment | 540 (FHA), 620 (conv.) | 0% (Zero Down, USDA) | Conventional, FHA, VA, USDA, Zero Down, Jumbo, Renovation, Reverse, HELOC | 0% down options, nontraditional credit accepted, 120-day free rate lock |
| CrossCountry Mortgage | Speedy closing | 500 (FHA), 620 (conv.) | 3.5% (FHA) | Conventional, FHA, VA, USDA, Jumbo, Manufactured Homes | FastTrack program closes in 10 days, up to $4,000 down payment assistance |
| Fairway | First-time homebuyers | 500 (FHA), 620 (conv.) | 3.5% (FHA) | Conventional, FHA, VA, USDA, Jumbo, Physician, Renovation, Reverse | $7,500 grant, 1-year home warranty, $10,000 seller guarantee if financing fails |
| Rate | Online experience | 580 (FHA), 620 (conv.) | 3.5% (FHA) | Conventional, FHA, VA, Jumbo, Physician, HELOC, Reverse | Same-day approval, 10-day closing, 1% down payment via OneDown + $1,000 closing credit |
For a personalized recommendation, check with the FHA’s lender search tool to find approved lenders in your area.
FHA Loan Limits for 2025
FHA loan limits vary by county and are updated annually. In 2025, the limits for single-family homes range from $420,680 in low-cost areas to $970,800 in high-cost areas.
For multi-unit properties (2-4 units), the limits are higher. Check the official HUD website for the most current limits in your area.
Is an FHA Loan Right for You?
FHA loans are excellent for:
- First-time homebuyers
- Buyers with limited savings for a down payment
- People with credit challenges
- Homebuyers with higher debt-to-income ratios
However, they might not be ideal if:
- You can qualify for a conventional loan (which might have lower overall costs)
- You’re buying an investment property
- The home price exceeds FHA loan limits in your area
- The property doesn’t meet FHA standards
If you’re exploring alternative housing options, our article on what is rent-to-own and how it works might provide another path to homeownership.
Frequently Asked Questions
What is an FHA loan, and who does it help?
An FHA loan is a mortgage insured by the Federal Housing Administration, designed for borrowers who may have lower credit scores or limited savings. It’s especially popular among first-time homebuyers, as you can put down as little as 3.5% with a 580+ credit score.
How does an FHA loan differ from a conventional loan?
FHA loans generally have more flexible credit and down payment requirements but require ongoing mortgage insurance premiums. Conventional loans may carry fewer fees if you have a higher credit score or can put down 20%. If you’re weighing other housing options, see Public Housing vs. Section 8 for a quick look at certain HUD programs.
What credit score do I need for an FHA loan?
You can qualify with a score as low as 500, but you’ll need 10% down if it’s under 580. A score of 580+ lets you put down just 3.5%. Individual lenders may set higher minimums. For more on credit issues, see how credit scores impact housing assistance .
What are the property requirements for an FHA loan?
The home must be your primary residence and meet FHA appraisal standards for safety and livability. Multi-unit properties (up to four units) are permitted as long as you occupy one. For an overview of different property types, check 10 common types of housing .
How do I apply for an FHA loan?
You’ll start by getting preapproved with an FHA-approved lender, then provide documentation such as pay stubs, bank statements, and tax returns. The property will need an FHA appraisal. For help with your down payment, you might look into housing grants to cover initial costs.
Do I need mortgage insurance for an FHA loan?
Yes. FHA loans require both an upfront mortgage insurance premium (usually 1.75% of the loan amount) and an annual premium paid monthly. Conventional loans only require private mortgage insurance (PMI) if you put down less than 20%, and you can drop it once you have 20% equity.
How do I find the best FHA lender for me?
Compare rates, fees, and customer service from multiple FHA-approved lenders. Ask about closing timelines, preapproval processes, and first-time homebuyer programs. Some lenders specialize in lower credit profiles or faster closing if that’s your priority.
Is an FHA loan right for me?
FHA loans are great for first-time buyers or those with lower credit scores, but they do come with ongoing mortgage insurance costs and certain property restrictions. If you can qualify for a conventional loan or are considering another path, check out how rent-to-own works as another option for eventually owning a home.
Conclusion
FHA loans have helped millions of Americans achieve their dream of homeownership despite credit or savings challenges. By understanding the requirements and benefits of these government-backed mortgages, you’ll be better prepared to make informed decisions about your homebuying journey.
Remember that mortgage options and requirements change over time, so it’s always best to consult with multiple lenders to find the best fit for your specific situation. With some preparation and the right loan product, you could be on your way to owning your own home sooner than you think.
Have questions about FHA loans or other housing programs? Let us know in the comments below!