An FHA loan is the mortgage most first-time buyers end up measuring everything else against, and the reason is simple arithmetic. On a $300,000 house, 3.5% down is $10,500. A conventional loan at 5% down asks for $15,000. A 20% down loan wants $60,000. That $4,500 gap between FHA and conventional is often the difference between buying this spring and renting for another year.
But the headline number hides a lot. FHA loans carry mortgage insurance for the life of the loan in most cases, they come with property standards that can stall a deal, and the loan limits cap what you can buy in expensive markets. Here’s what the program actually looks like once you get past the brochure.
What an FHA loan really is
The Federal Housing Administration doesn’t lend you money. A regular bank or credit union does, and the FHA insures the lender against loss if you default. That insurance shifts risk off the lender’s books, which is why a loan officer will approve a buyer with a 600 score and 3.5% down on an FHA loan but turn the same person away from a conventional one.
The program has insured more than 34 million properties since 1934. It’s not a niche product or a last resort. It’s a mainstream mortgage that happens to be built for people without a 20% down payment or a decade of credit history.
The 3.5% down payment is real, but it isn’t the whole bill
First-time buyers routinely budget for the down payment and forget everything sitting next to it. On a $280,000 purchase, here’s a realistic cash picture:
- Down payment (3.5%): $9,800
- Closing costs: typically 2% to 5% of the loan, so $5,600 to $14,000
- Prepaid taxes and insurance escrows: often $2,000 to $3,500
- Upfront mortgage insurance premium: 1.75% of the loan, about $4,725 (usually financed into the loan)
So the honest cash requirement is closer to $17,000 to $25,000, not $9,800. The good news is that FHA allows the entire 3.5% to be a gift from a family member, and it allows sellers to credit up to 6% of the price toward your closing costs. Between a gift and a seller credit, plenty of buyers close with very little of their own money in the deal. Our breakdown of the FHA down payment rule and the cash nobody warns you about goes deeper into which funds count and which get flagged.
Credit score: there are two thresholds, not one
FHA sets a floor of 500, but the down payment changes depending on where you land.
580 and above
You qualify for the full 3.5% down program. That’s the version everyone talks about.
500 to 579
You need 10% down. On a $250,000 house that’s $25,000 instead of $8,750, which usually changes the timeline by a year or two.
Below 500
No FHA financing. At that point you’re looking at different options entirely, and our list of home loans for bad credit that actually say yes is a better starting point than arguing with an underwriter.
One thing people miss: individual lenders can set their own minimums above the FHA floor. Plenty of banks won’t touch anything under 620 even though FHA allows 580. If one lender turns you down, a broker or a smaller community bank may not.
FHA versus conventional, side by side
The right answer depends less on which program is “better” and more on which one fits your file today.
- Down payment: 3.5% on FHA, as little as 3% on some conventional first-time buyer programs — but those usually demand a 620+ score
- Credit: FHA works from 580, conventional generally wants 620 or higher for the low-down-payment versions
- Mortgage insurance: FHA’s premium typically lasts the life of the loan; conventional PMI drops off once you hit 20% equity
- Debt-to-income: FHA is more forgiving, with automated approvals stretching past 50% in some cases
- Property condition: FHA appraisals are stricter, which matters in a hot market
- Loan size: FHA caps the loan amount by county; conventional conforming limits run higher
If you’re still weighing structures, this comparison of the different types of mortgage loans walks through where each one wins and where it costs you.
Mortgage insurance is the cost that sticks around
This is the part first-time buyers underweight. FHA charges an upfront premium of 1.75% of the loan amount, plus an annual premium of roughly 0.55% of the loan, billed monthly. On a $270,000 base loan that’s about $124 a month on top of principal and interest.
If you put down less than 10%, that monthly premium generally stays for the life of the loan. You can’t just ask for it to be removed at 20% equity the way you can with conventional PMI. The exit is refinancing into a conventional loan once you have the equity and the credit score to qualify. Many FHA buyers plan for exactly that around year three or four. Budget for the premium now, and treat a future refinance as a bonus rather than a plan.
Loan limits decide where you can shop
FHA caps the loan amount by county, and the cap is a hard ceiling. Go $5,000 over and you need a different program or more cash. Low-cost counties use a national floor (it’s $524,225 for 2025), high-cost metros get ceilings well over $1 million.
Before you fall in love with a listing, check the limit for that specific address. FHA publishes a lookup tool, and the numbers reset every January. Our look at FHA loan limits and how buyers can plan around them explains how the floor and ceiling work and what rising limits mean for your search area.
Rates: compare the APR, not the headline
FHA rates often quote a touch lower than conventional on the same morning, which looks great until you notice the mortgage insurance sitting on top. The annual premium is baked into the APR, and the APR is the number that reflects what you actually pay.
Get quotes from at least three lenders on the same day, for the same loan amount and lock period. Ask each one for the APR, the total monthly payment including insurance and taxes, and the closing costs in dollars. A quarter-point difference in rate on a $300,000 loan is roughly $50 a month, which is $18,000 over thirty years. Our guide to FHA mortgage rates and how to beat the quote covers the specific levers that move your number.
The appraisal can still kill a deal
FHA appraisals follow Minimum Property Requirements, and they’re stricter than a conventional appraisal. Peeling exterior paint, a missing handrail on a stairwell, a roof with visible damage, broken windows, an inoperable furnace, or exposed wiring will all come back as repair items the seller has to fix before closing.
In a market with multiple offers, that pushes some sellers toward conventional buyers. You can compete by writing an FHA offer with a repair allowance or an escrow holdback for minor items, and by getting pre-approved rather than pre-qualified so the seller knows your file has already been through underwriting. Condos add another wrinkle: the building has to be on FHA’s approved list, or you need a spot approval.
Income paperwork trips up more buyers than credit does
Underwriters want a two-year paper trail. Salaried buyers hand over W-2s and pay stubs. Everyone else has a harder road: freelancers, contractors, small business owners, gig workers, and anyone with heavy commission or rental income. Expect to provide two years of tax returns, a current profit and loss statement, and possibly a year-to-date balance sheet.
If your tax returns show aggressive deductions that shrink your income on paper, that’s what the lender counts, not what you actually deposited. Self-employed buyers should read which mortgage types self-employed buyers actually get approved for before submitting an application, because the fix often starts with how the last two returns were filed.
A six-month prep plan that works
Start by pulling all three credit reports for free and disputing anything inaccurate. Errors are common and fixing them can move a score 20 to 40 points in a couple of months. Then run your own debt-to-income math: add up minimum payments on every card, car loan, and student loan, divide by gross monthly income, and aim to land under 43%. Paying down a $3,000 card balance to $600 can do more for your approval odds than shopping for a better rate.
Save toward 5% to 6% of your target purchase price in cash, not 3.5%, so closing costs don’t wipe you out. Get a full underwritten pre-approval rather than a pre-qualification, and keep it current. Once you’re in contract, don’t open a store card, finance a car, or move money between accounts without telling your loan officer — underwriters re-pull credit right before closing, and a new $45 monthly payment has killed more FHA deals than bad credit ever did.