FHA Loan Requirements, Limits, How to Apply and Best Lenders
An FHA loan can help you become a homeowner, even if you have a troublesome credit history and a small down payment. As a government-backed loan program, FHA loans have more flexible qualifying requirements than conventional loans.
However, that flexibility comes with extra costs that can add up over the life of a 30-year mortgage. Understanding FHA loan requirements and fees can help you decide if it’s the best choice to finance your home purchase.
Key takeaways about FHA loans
→ Popular for first-time homebuyers with limited down payment funds, but repeat buyers are also eligible.
→ A good alternative for borrowers that earn more income than most conventional low-down-payment mortgage programs allow.
→ Mortgage insurance is required regardless of your down payment amount, which can make the loan more expensive overall than a conventional loan.
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA) that follows underwriting guidelines set by the U.S. Department of Housing and Urban Development (HUD). Because the FHA will reimburse a lender if an FHA loan borrower defaults on their loan, lenders are able to provide home loans to borrowers with low credit scores and small down payments.
However, FHA loans can get pricey — you’re required to pay two types of FHA mortgage insurance to protect your lender against losses if you can’t make your mortgage payments. You’ll also need to stay within FHA loan limits, which place a cap on how much you can borrow.
FHA loan interest rates
FHA loan rates are typically lower than conventional loan rates. However, only FHA-approved lenders can offer FHA loan rates, which means you may have fewer options to compare when shopping for the best rate.
Interest rates offered on FHA loans are almost always lower than those offered on conventional loans. However, the annual percentage rate (APR) disclosed on Page 3 of your loan estimate — which represents your total cost of borrowing — also includes ongoing fees like mortgage insurance.
FHA borrowers who make the minimum down payment (3.5%) will have to pay mortgage insurance for the life of their loans. It’s those years of extra insurance premiums that can push the total cost of borrowing an FHA loan higher than the total cost of a conventional loan.
How does an FHA loan work?
FHA loans are backed by the FHA but offered by FHA-approved lenders — typically banks and credit unions. The basic process for getting an FHA loan are the same as a conventional loan:
- You’ll document your income and assets to qualify
- You’ll have a credit report pulled
- You’ll provide your employment and address history
Despite the similarities, there are some key differences worth noting that make FHA loans unique:
- You won’t get approved if you haven’t repaid other government-backed loans. FHA-approved lenders must check the Credit Alert Interactive Verification Reporting System (CAIVRS) to determine whether you’ve defaulted on another government-backed loan. If they discover that you’re delinquent on student loans, Small Business Administration (SBA) loans or other government debt, your FHA loan application may be denied.
- You could get a refund on FHA mortgage insurance if you refinance. When you apply for an FHA loan, your new address is tied to an FHA case number. If you decide to refinance your mortgage in the future, a lender will use the case number to determine whether you’re owed a refund for FHA mortgage insurance you’ve already paid.
- You’re required to buy an FHA appraisal. Homebuyers must get an FHA appraisal regardless of their down payment percentage or credit score tier. The process includes a detailed analysis of the safety and livability of the home. The FHA doesn’t offer the appraisal waiver that’s available to qualified conventional borrowers.
- You can cancel your sales contract after a low appraisal. An “amendatory clause” is included in your FHA mortgage paperwork. It gives you the legal right to cancel your contract if the appraised value is lower than the sales price.
FHA purchase loan
Most homebuyers choose a “standard” FHA loan to buy their home. Also called the 203(b) loan program, this type of FHA loan features the down payment and credit score flexibilities discussed above. And don’t forget: The amendatory clause gives you a “get out of the contract free” card if the appraised value doesn’t match the purchase price.
Who it’s good for: Low-credit-score borrowers who don’t have a lot saved for a down payment.
FHA refinance loan
If you have at least a 580 credit score, you can replace your current FHA loan with a new one and borrow up to 97.75% of your home’s value. You can also roll your FHA closing costs into the total loan amount. This is commonly known as a “rate-and-term” refinance.
Who it’s good for: Homeowners who don’t have enough equity or a high-enough credit score to qualify for a conventional refi.
FHA streamline refinance
If you have an existing FHA loan you may qualify for an FHA streamline refinance to lower your payment or reduce your term. An added bonus: You can skip providing income documents and paying for a home appraisal, which makes the process easier than a regular FHA refinance.
Who it’s good for: Homeowners who have a current FHA loan and want to save money with a new FHA loan.
FHA cash-out refinance
You may qualify to borrow more than you currently owe and pocket the cash difference with an FHA cash-out refinance, even with a credit score as low as 500. However, you can’t borrow more than 80% of your home’s value, and the cash-out option only applies if the home is your principal residence.
Who it’s good for: Homeowners that want to tap their home’s equity to pay off revolving debt or meet other financial goals.
FHA 203(k) renovation loan
Buy or refinance a home and roll the renovation costs into the same mortgage with the 203(k) loan program. You can choose the limited program for small projects (under $35,000), while the standard program gives you more cash for larger projects.
Who it’s good for: Borrowers who want to buy or refinance and roll the cost of home repairs into one loan.
Home equity conversion mortgage (HECM)
The HECM loan, more commonly known as a reverse mortgage, gives borrowers aged 62 or older multiple ways to convert their home equity to cash or income. The big selling point is that unlike a regular mortgage, there is no monthly payment. The equity amount you’d qualify to borrow is based on the youngest homeowner’s age, and you’ll usually need at least 50% equity to be eligible.
Who it’s good for: Seniors that want to convert their equity to income, a credit line, a lump sum payout or a combination of all three; also known as a reverse mortgage.
FHA energy-efficient mortgage
Called an EEM for short, this program lets you add the cost of energy-saving upgrades — between $1,500 and $25,000 — to the balance of a purchase or refinance loan.
Who it’s good for: Homebuyers or homeowners who want to add the cost of green upgrades to their home loan.
FHA GPM and GEM loans
Two lesser used loan programs are the graduated payment mortgage (GPM) and growing equity mortgage (GEM). The GPM loan starts off with negative amortization (meaning your balance will actually grow during the first few years) and has monthly payments that increase annually. If you’d like to pay off your mortgage earlier, the GEM loan features monthly payments that increase on a set schedule to shrink your principal balance at a quicker pace.
Who it’s good for: Homebuyers who want the lowest payment early in their career or plan to pay off their loan faster with income increases.
How the FHA helps if you can’t make payments
FHA loan requirements
For the most part, FHA loan guidelines are more flexible than other loan programs. Here’s a quick snapshot of the FHA’s minimum mortgage requirements:
| Requirement | |
|---|---|
| Credit score | 500 (10% down payment), 580 (3.5% down payment) |
| Down payment | 3.5% (580+ score), 10% (500 to 579 score) |
| Debt-to-income ratio | 43% |
| Mortgage insurance | Yes |
| FHA loan limits | Yes |
| Income limits | No |
| Occupancy | Primary |
Keep in mind that individual lenders have leeway to set higher minimum requirements if they choose to.
Minimum credit score: 500
You may qualify for an FHA loan with a score as low as:
- 580 if you’re making the minimum 3.5% down payment.
- 500 if you’re putting down 10% or more.
→ No other government-backed loan program allows scores this low.
FHA loans work for people with a rough credit history
FHA loans may be the only choice for borrowers with rough patches in their credit history. Major credit events like bankruptcies and foreclosures require a four- to seven-year wait time for conventional financing. However, you’re eligible for an FHA loan:
- Two years after a Chapter 7 bankruptcy
- Three years after a foreclosure
Minimum down payment required: 3.5%
In addition to the 3.5% down payment requirement, FHA loan guidelines don’t require you to come up with your own money to buy a home. Your down payment funds can be gifted from a relative, employer or labor union.
You can even sell an asset like a car to come up with the money. Be sure to document the sale with copies of the ownership transfer to the buyer and the money transfer to you.
Maximum DTI ratio: 43%
Lenders divide your total debt by your pretax income to determine your debt-to-income (DTI) ratio. Historical data shows that the higher the ratio, the tougher it is to make your monthly mortgage payment.
Although FHA guidelines set the maximum at 43%, you may qualify with a DTI ratio above 50% — if you have a strong credit score and extra cash reserves.
Read more about how to improve your credit score.
FHA mortgage insurance required
The FHA requires two types of mortgage insurance on every FHA loan:
- An upfront mortgage insurance premium (UFMIP) that costs 1.75% of the loan amount and is typically added to your mortgage balance.
- An annual mortgage insurance premium (MIP) that costs between 0.15% and 0.75% of the loan amount. The annual cost is divided by 12 and added to your monthly mortgage payment.
The best way to reduce how much monthly FHA insurance you pay is to make a higher down payment, choose a 15-year loan term or borrow less. Use an FHA loan calculator to try out different scenarios and see how they affect your monthly payment. Or, better yet, ask your loan officer to provide you with loan estimates featuring different variations.
There are two important differences between FHA mortgage insurance and private mortgage insurance offered on conventional loans.
- Your credit scores don’t impact FHA mortgage insurance premiums. You’ll pay the same FHA mortgage insurance premiums regardless of your credit score. PMI premiums, on the other hand, vary by credit scores and may be too costly for low-credit- score borrowers.
- You can’t cancel FHA mortgage insurance (in most cases). If you make less than a 10% down payment, you must pay FHA mortgage insurance for the life of the loan. If you put down at least 10%, you’ll still have to pay mortgage insurance, but the monthly charge will drop off automatically after 11 years. Conventional loan borrowers, on the other hand, can cancel their PMI as soon as they reach 20% home equity.
Borrow up to the maximum FHA loan limits
The FHA caps how much you can borrow each year when it sets FHA loan limits. The limits are a percentage of the conforming loan limits set annually by the Federal Housing Finance Agency.
→ The bottom line: You can’t borrow as much money with an FHA loan as you can with a conventional loan.
You can find your local loan limits on the FHA mortgage limits website. The table below breaks down this year’s national limits for low and high cost of living areas.
| Number of units | Low-cost area limits | High-cost area limits |
|---|---|---|
| One unit | $472,030 | $1,089,300 |
| Two units | $604,400 | $1,394,775 |
| Three units | $730,525 | $1,685,850 |
| Four units | $907,900 | $2,095,200 |
Tip: Choose a conforming loan for higher loan amounts
FHA income requirements: 2-year job history
Another perk of FHA loans is there are no income limits. That’s good news if you’re low on down payment funds but earn more than the median income limits in your neighborhood.
However, you’ll need pay stubs and two years’ worth of W-2s and employer contact information to document a stable job history. You’ll also need to provide explanations for any large gaps in your employment.
FHA loans available only for primary home purchases
You must live in a home purchased with an FHA loan as your primary residence for at least one year. Conventional loans, on the other hand, allow you to finance a vacation home or rental property.
Cash reserves for high DTI or low credit score applicants
A high DTI ratio or low credit scores may trigger a requirement for mortgage cash reserves, which is rainy-day money you have on hand to cover a set number of monthly mortgage payments. You’ll also need cash reserves if you’re buying a multifamily home and plan to rent out the extra units.
Should I get an FHA loan?
If you’re looking to get a home without having to make a large down payment, an FHA loan can be a great way to do it — especially if you don’t qualify for conventional low-down-payment loan programs.
FHA loans have more flexible credit requirements that may make the most sense for you if you can’t qualify for a conventional loan due to low credit.
Just be sure you compare the full costs associated with any loans you’re considering. FHA loans may come with lower interest rates and more flexible requirements, but their mortgage insurance costs can bump up their APRs.
Use our FHA loan calculator to estimate your monthly payment.
How to get an FHA loan
Applying for an FHA loan is fairly similar to applying for any type of home loan, with a few exceptions. Here are seven basic steps to follow:
1. Shop with several FHA-approved lenders. Not all lenders offer the same types of FHA loans. Compare the rates and costs of at least three to five lenders, including mortgage brokers, mortgage lenders or your local bank or credit union. Start by reviewing our list of best lenders below. You can also put your basic financial information into an online rate comparison site and let lenders call you with their best offers.
2. Ask the right FHA loan questions. Not all loan officers are familiar with FHA loans, and asking the following questions may help you narrow down your lender choices:
- What is your company’s minimum FHA score requirement? Lenders may set higher credit score standards than the FHA requires.
- Do you specialize in 203(k) loans? The 203(k) loan has more moving parts and more people involved in the mortgage process than a regular loan. You must qualify based on regular FHA requirements, plus your renovation project and all the contractors involved need to be approved. Find a mortgage company with a dedicated FHA 203(k) department for a faster path to approval.
- Are you approved to offer DPA with your FHA loans? Check out down payment assistance (DPA) programs in your area. They may cover both your down payment and some closing costs. Some DPA programs require bank or lender approval. Verify that you’re working with a lender that offers the DPA program you’re interested in. One caveat: DPA programs often set income limits, so check the program details to confirm you don’t earn too much to qualify.
3. Complete an FHA loan application. Have basic information handy about your income, monthly debts and down payment funds as you fill out the application.
4. Give the lender permission to verify your credit scores. The lender will pull a credit report to verify that you meet the minimum FHA credit score requirement.
5. Provide two years of employment and income history. Collect pay stubs for the last 30 days, the last two years of W-2s or federal tax returns and employer contact information. You won’t need as much paperwork if you’re applying for a special FHA program, like a reverse mortgage or streamline refinance.
6. Document your down payment source. Lenders typically review two months’ worth of bank statements, or a letter explaining where the down payment and closing cost funds are coming from, if you’re buying a home. You might need a few months’ worth of cash reserves in the bank if your credit scores are below 580 or your DTI ratio is high.
7. Explain and document any defaulted federal debt. If you’ve recently paid off defaulted student loans or other government debt, provide a letter of explanation and supporting documents to the lender.
How much are FHA closing costs?
You’ll pay between 2% and 6% of your loan amount toward FHA closing costs. Besides mortgage insurance, there are some closing costs features unique to FHA loans.
- You’ll need an FHA appraisal for a purchase. The extra inspection paperwork isn’t required on conventional mortgages, making the entire process more expensive for FHA borrowers.
→ How much does it cost? A typical FHA home appraisal will cost you between $400 and $700, compared to $300 or $500 for a conventional appraisal.
- More closing costs can be paid by the seller. The seller is allowed to contribute up to 6% of the home’s purchase price toward your closing costs, which is more than the 4% maximum conventional guidelines allow with a minimum down payment. Consider asking the seller to put that extra 2% toward the upfront mortgage insurance premium you’ll have to pay.
Pros and cons of FHA loans
| Pros | Cons |
|---|---|
Lower credit score minimums. You may qualify with scores 40 to 120 points lower than conventional loans. | Higher mortgage insurance costs. You’re stuck with the bill for two types of mortgage insurance, compared to one for conventional loans. |
Higher DTI ratio limits. A heavy debt load is less of an obstacle than it is for conventional loans. | Lower maximum loan limits. You give up $254,170 of borrowing power choosing an FHA loan over a conventional loan. |
Credit scores don’t impact mortgage insurance premiums. Conventional PMI, on the other hand, may be unaffordable with a low credit score. | Life-of-loan mortgage insurance is required with a minimum down payment. In this scenario, the only way to remove it is to refinance to a different type of loan. |
Variety of programs. Choose from renovation, reverse and energy-efficient loan options. | Mortgage insurance is required regardless of the down payment amount. A 20% down payment on an FHA loan still requires mortgage insurance. |
No maximum income limits. This is good news if you make too much for a conventional first-time homebuyer loan program. | Limited to primary residences. You’ll need a conventional loan to buy a second home or investment property. |
Refinance programs available without income verification or an appraisal. Conventional loan requirements don’t offer this flexibility. | Closing costs can’t be rolled into an FHA streamline refinance loan. You can only finance interest and FHA mortgage insurance. |
FHA loan vs. conventional loan
Often the choice between an FHA and conventional loan comes down to credit scores and total debt. Conventional loans are the most popular mortgage type, but borrowers have to meet higher qualifying standards to get approved for one.
It makes sense to choose an FHA loan if:
Your credit score is below 620
You can’t afford a large down payment
You have bankruptcy or foreclosure in your background
You earn too much income to qualify for conventional low-down-payment programs like Fannie Mae HomeReady or Freddie Mac Home Possible
It makes sense to choose a conventional loan if:
You need to borrow more than FHA loan limits allow
You can afford to make a 20% down payment
You want to buy a vacation home or investment property
The table below highlights the major differences between FHA and conventional loans.
| Loan feature | FHA mortgage | Conventional mortgage |
|---|---|---|
| Minimum down payment | → 3.5% with a 580 credit score | → 3% |
| Minimum credit score | → 500 to 579 with a 10% down payment | → 620 |
| Maximum DTI ratio | → 43% with exceptions up to 50% or higher | → 45% with exceptions up to 50% |
| Maximum loan limits | → Lower than conventional loan limits | → Higher than FHA loan limits |
| Appraisal requirements | → Required on all purchase loans | → May be waived on some purchase and refinance loans |
| Mortgage insurance | → Two types required → Required regardless of down payment amount | → One type required → Requirement waived with a 20% down payment |
| Occupancy | → Primary residence only | → Primary, second or investment home |
| Streamline refinance available? | → Yes | → No |
Summary: The best FHA lenders
| Lender | LendingTree rating and best of category | Minimum credit score (FHA loans) | Minimum down payment (FHA loans) | Lender review |
|---|---|---|---|---|
 |  Online mortgage rates | 580 | 3.5% | Read our review |
 | Online experience | 580 | 3.5% | Read our review |
 |  Overall FHA lender | 600 | 3.5% | Read our review |
 |  FHA loans with bad credit | 500 | 3.5% | Read our review |
Best for access to mortgage rates online: PennyMac
PennyMac at a glance
- Minimum credit score (FHA loans): 580
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, streamline refinance, cash-out refinance
- Additional loan products: Conventional, VA, home equity, jumbo
- LendingTree rating:
Read review
PennyMac is a large mortgage lender based in California, offering home loans in all 50 states and some U.S. territories. The rate-shopping experience you’ll find on PennyMac’s website is a relief — compared to some lenders that either don’t publish rates at all or force you to fill out a form before you can see them. PennyMac is also one of the few lenders we came across that place FHA loan rates front and center in their general rate information, right next to conventional and other loan types. The only limitation is that the rates interface doesn’t allow you to filter by credit score, location, home price or any other factor. For customized rates, you’ll have to bite the bullet and complete the form.
Best online experience: Flagstar Bank
Flagstar Bank at a glance
- Minimum credit score (FHA loans): 580
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase
- Additional loan products: Conventional, VA, USDA, jumbo, HELOCs
- LendingTree rating: Read review
Flagstar, established in 1987, is the third-largest savings bank in the U.S. and issues home loans in all 50 states. It doesn’t offer a huge variety of FHA loan products, but it does provide a stellar online experience. Flagstar publishes rates online, offers helpful product information and resources about mortgage lending on its website and has a convenient online application. And if you’re hoping for the option to go in person to a brick-and-mortar location, you may be in luck: Flagstar operates branches in a handful of states across the country.
Best overall FHA lender: AmeriSave Mortgage
AmeriSave Mortgage at a glance
- Minimum credit score (FHA loans): 600
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, streamline refinance, cash-out refinance
- Additional loan products: Conventional, VA, USDA, jumbo
- LendingTree rating:
Read review
AmeriSave Mortgage, based in Atlanta, lends to borrowers in 49 states (New York excluded) and the District of Columbia. With more than 20 years of issuing mortgages, the company offers three of the four popular FHA loan programs we look for: purchase, streamline refinance and cash-out refinance. None of the lenders in our roundup offer FHA 203(k) loans, a type of FHA loan used for construction, so AmeriSave is still top of the class for loan variety. Its robust suite of FHA programs, paired with a strong online experience that includes an online application and rate information, pushed AmeriSave to the top of our list. AmeriSave’s rates are updated regularly and can be customized to your situation.
Best for FHA loans with bad credit: Carrington Mortgage Services
Carrington Mortgage at a glance
- Minimum credit score (FHA loans): 500
- Minimum down payment (FHA loans): 3.5%
- Available FHA loan programs: Purchase, refinance, streamline refinance
- Additional loan products: Conventional, VA, jumbo, USDA
- LendingTree rating: Read review
If you’re looking for a lender that’s willing to take a chance on borrowers with low credit scores, Carrington could be a great choice for you. The company not only offers a variety of FHA loans, but it’s also willing to accept borrowers with a minimum 500 credit score. That’s about 150 points below the average required score for the other lenders we reviewed.
Frequently asked questions
The major factors that can disqualify you for an FHA loan are a low credit score, high DTI ratio and a history of defaulting on federal debt. Federal debt includes VA and USDA loans and unpaid child support. You’ll also have to show that you have enough cash to meet the minimum down payment requirement.
Yes. FHA-approved lenders can preapprove you for an FHA loan based on your income, debt and credit scores. However, the home you buy will need to meet the FHA’s strict minimum property requirements for final approval.
You can either wait 11 years after making a 10% down payment on an FHA loan, or refinance to a conventional loan. Only conventional loans offer additional options to get rid of mortgage insurance.
There are three factors that determine the maximum amount you can get from an FHA loan.
- Your DTI ratio, which lenders calculate based on your income and total debt (including the new mortgage payment)
- Your location, which sets the FHA loan limits for local lenders
- Your property type and number of units (loan limits are higher for two- to four-unit homes)
Your best bet is to get preapproved with a loan officer for the most accurate estimate of the FHA loan amount you qualify for. You can also use a home affordability calculator to crunch the numbers.