A 3.5% down payment on a $350,000 house comes to $12,250. That single number explains why roughly one in six purchase mortgages in the U.S. is insured by the Federal Housing Administration. It also explains why plenty of those borrowers end up paying mortgage insurance for decades longer than they expected. Both facts are true at the same time, and any honest look at FHA loan pros and cons has to hold them together.
Here’s what actually matters when you’re deciding whether to use one.
How FHA Lending Works Under the Hood
The FHA doesn’t lend you money. It insures the lender against the possibility that you default, and the lender pays a premium for that protection. Because the government carries most of the risk, lenders can approve people with lower credit scores, thinner savings and higher debt-to-income ratios than they’d tolerate on a conventional loan.
You pay for that insurance in two pieces. An upfront premium of 1.75% of the base loan amount, which most borrowers roll into the loan balance, and an annual premium billed monthly, usually 0.55% of the loan amount for loans under $726,200.
The Pros: Where FHA Loans Genuinely Win
Down payments that match what people actually have saved
FHA requires 3.5% down with a 580 credit score. Between 500 and 579, you’ll need 10% down. That’s a dramatically lower barrier than the 20% most people assume they need, and unlike some low-down-payment conventional programs, there’s no first-time-buyer requirement and no income cap in most of the country.
Credit flexibility that conventional loans won’t give you
A 580 score is not a strong credit profile, and FHA still works with it. The program also allows debt-to-income ratios up to 50% when an automated approval comes back clean, which matters enormously for people carrying student loans or a car payment. Non-occupant co-borrowers are permitted too, so a parent or sibling can go on the loan to help with qualifying. If you want the full checklist of score, DTI and documentation rules, this guide to qualifying for an FHA mortgage walks through the current standards line by line.
Seller concessions up to 6%
FHA lets the seller credit up to 6% of the purchase price toward your closing costs, prepaid taxes and insurance. On a $350,000 home that’s $21,000, which can wipe out most or all of your out-of-pocket closing costs. Conventional loans cap seller credits based on your down payment, and at 5% down the cap is 3%. In a soft market, that gap is worth real money.
Assumability and the streamline refinance
FHA loans are assumable, meaning a future buyer can take over your loan at your existing interest rate if they qualify. If you locked in at 5% and rates are sitting at 7%, that’s a marketing feature when you sell. FHA also offers a streamline refinance with reduced documentation and no new appraisal in many cases, which is a cheap escape hatch if rates fall.
Multi-unit and rehab options
You can buy a duplex, triplex or fourplex with an FHA loan as long as you live in one unit, and rental income from the other units counts toward qualifying. The 203(k) program lets you finance a fixer-upper plus the renovation costs in a single loan, which is far cheaper than a purchase loan stacked with a separate construction loan.
- 3.5% minimum down payment, gift funds allowed
- Credit scores down to 580 and sometimes 500
- DTI up to 50% with automated approval
- Seller credits up to 6% of the price
- Assumable by a future buyer
- Streamline refinance with limited paperwork
- Two-to-four-unit properties and 203(k) rehab loans
The Cons: What the Brochures Leave Out
Mortgage insurance that follows you home
This is the biggest cost of an FHA loan, and it’s the one most buyers underestimate. Put 3.5% down and the annual mortgage insurance premium stays on the loan for the entire 30-year term. You can only remove it by refinancing into a conventional loan or selling the house.
Run the arithmetic. On that $350,000 purchase, the monthly MIP lands around $155. Held for 30 years, that’s roughly $55,800 in insurance premiums, on top of the $5,900 upfront charge. A conventional loan with private mortgage insurance typically drops PMI once you reach 20% equity, often after five or six years of payments and appreciation.
Put 10% down instead and the MIP falls away after 11 years. That’s the single most valuable trade-off in the entire FHA rulebook, and it’s why some borrowers deliberately scrape together 10% rather than 3.5%.
Loan limits cap what you can buy
FHA sets a maximum loan amount that varies by county. In 2025 the floor for low-cost areas was $524,225, with a ceiling near $1.21 million in expensive markets. Cross that line and FHA is simply off the table, which rules it out for a lot of buyers in Seattle, Denver or coastal California.
Property standards are strict
FHA appraisals include a minimum property requirements checklist, and it’s more than a valuation. Peeling exterior paint, missing handrails on stairs, exposed wiring, a shared well, a roof near the end of its life, or a crawlspace without a vapor barrier can all trigger repair demands before closing. Sellers sometimes refuse, especially on older homes or estate sales where nobody wants to fix anything. That’s how FHA buyers lose houses to cash offers.
Slower closings and more paperwork
Plan on 45 days rather than 30. The appraisal takes longer, amendments for repairs add steps, and the case number process introduces a layer that conventional loans don’t have. In a bidding war, that timeline is a genuine disadvantage.
FHA vs. Conventional on a $350,000 House
A borrower with a 700 score and $12,250 saved will usually pay less over time with a conventional 97 loan, because the PMI falls off. A borrower with a 620 score and a 48% debt-to-income ratio will often get approved for FHA when the conventional automated system says no. Same house, same price, completely different answers depending on the file.
The break-even point is worth calculating rather than guessing. Compare the FHA payment including MIP against the conventional payment including PMI, then ask how many years it takes before you’d have 20% equity and could drop PMI. If the answer is under seven years and you plan to stay, conventional usually wins on total cost.
When FHA Is Clearly the Right Call
Certain situations make the decision easy. A first purchase with limited savings and a credit score in the low 600s. A single parent using gift funds from family. A buyer who wants a duplex and needs the rental income to qualify. A borrower recovering from a short sale or bankruptcy who has waited out the FHA waiting periods, typically three years for a foreclosure and two for a Chapter 7 bankruptcy. A buyer whose only realistic path to homeownership runs through a 3.5% down payment.
When You Should Walk Away From It
If you have 15% or more saved and a 740 score, FHA is usually the more expensive choice, and a loan officer recommending it is either not paying attention or chasing a commission. If you’re buying raw land or a plot to build on later, FHA doesn’t apply at all, so you’d need to understand how a lot loan mortgage works instead. If you’re self-employed with heavy write-offs and a tax return that understates your real income, a bank-statement or asset-depletion program may beat both FHA and conventional. That’s the territory covered in this breakdown of portfolio mortgages held by a single lender, where underwriting is done by a human who can look past an unusual financial picture.
And if your income is low now but rising fast, a standard 30-year FHA loan may still feel tight in years one through five. A graduated payment mortgage starts with lower payments that step up on a schedule, which fits residents, new attorneys and salespeople on ramp-up comp. It’s a niche product with real risk if your raises don’t materialize, but it exists for a reason.
Three Numbers to Run Before You Sign
First, the total monthly payment including MIP, taxes, insurance and HOA. Not the principal and interest figure, the full number, compared against your actual take-home pay rather than your gross income.
Second, the total insurance cost over the years you realistically expect to own the home. Multiply the monthly MIP by 12 and by your expected holding period, then add the upfront premium. A borrower who stays seven years and then refinances is in a completely different position from one who stays 30 years on the same loan.
Third, the equity threshold where you could refinance out of FHA. Aim for 20% equity based on a new appraisal, and track home values in your neighborhood so you know when that moment arrives. Set a calendar reminder to check once rates drop by half a point or your balance hits 80% of the original value, whichever comes first. That one habit is worth more than any lender’s advice about which loan product looks better on paper.