What Is an FHA Loan and How Does It Work?

FHA loans can make it easier for low- and moderate-income borrowers to buy a home, make repairs, or tap their equity.

By Mary Beth Eastman

Written by

Freelance writer

Mary Beth Eastman has covered personal finance for more than seven years and is an expert on mortgages, student loans, and insurance. Her work has been featured by U.S. News & World Report, Newsweek, and Money Under 30.

Written by

Mary Beth Eastman

Freelance writer

Edited by Reina Marszalek

Written by

Reina Marszalek

Former senior editor

Reina Marszalek has more than 10 years of experience in personal finance and is a former senior mortgage editor at Credible.

Written by

Reina Marszalek

Former senior editor

Reina Marszalek has more than 10 years of experience in personal finance and is a former senior mortgage editor at Credible.

Updated June 27, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

FHA loans are mortgages insured by the Federal Housing Administration (FHA). Because they’re government-backed, these mortgages have more flexible credit requirements and lower down payments, making them a good fit for low- to moderate-income borrowers and first-time homebuyers. However, anyone can apply for an FHA loan; there aren’t income limits to this loan type, although there are limits to how much you can borrow.

What is an FHA loan and how does it work?

FHA loans are a popular mortgage option, and it’s easy to see why. Borrowers can qualify for an FHA loan even with less-than-ideal credit; the U.S. Department of Housing and Urban Development (HUD) allows FHA loans for credit scores as low as 500. Another reason buyers often choose FHA loans is because they can put down as little as 3.5%, which means they can keep more of their cash for other needs.

Private mortgage lenders provide the FHA loan, and the federal government insures the loan. That government backing makes it less risky for private lenders to issue home loans to buyers with fair credit or fewer assets. It opens up opportunities for people who might otherwise have a tough time qualifying for a mortgage.

FHA loan vs. conventional loans

There are several differences when it comes to FHA loans vs. conventional loans. Conventional loans aren’t backed by the government and tend to come with stricter credit, collateral, and down payment requirements. FHA loans are government-insured, with looser credit requirements (but stricter property standards). Here’s how FHA loans compare to conventional mortgages:

FHA loans	Conventional loans
Lower minimum credit score	Higher minimum credit score
Down payment as low as 3.5%	Down payment as low as 3%
Property must meet FHA Minimum Property Standards (MPS)	Home must be appraised, but is not required to meet FHA minimum standards
Mortgage insurance premiums required on all loans	Private mortgage insurance required on loans with down payment of less than 20%
Loans capped at $472,030 (except in high cost of living areas)	Loans capped at $726,200 (except in high cost of living areas)

FHA loan requirements

To get an FHA loan, you’ll need to meet your lender’s requirements as well as FHA loan requirements. The government sets the minimum allowed credit score, down payment, and property standards, and caps the loan limit depending on where you live. Each lender will also review your loan application to determine whether to approve you for the FHA loan. Here are the specifics:

Criteria	FHA Requirement
Credit score	500+
Down payment	10% for FICO scores 500-579; 3.5% for FICO scores 580+
Debt-to-income ratio	43% (45% for energy-efficient homes)
Mortgage insurance	Required for all FHA loans; upfront mortgage insurance premium (MIP) plus monthly premiums
Loan limits	$472,030 for single-family homes ($1,089,300 in high cost of living areas)
Property standards	Property must meet Minimum Property Standards (MPS) under HUD regulations
Loan terms	Varies by lender and loan; maximum of 30 years

Types of FHA loans

There are several types of FHA loans. Choosing the right loan will depend on your age, the type of home, whether it needs repairs right away, and your goals.

203(b) mortgage: The 203(b) is the traditional FHA loan, ideal for buying a new home. Both fixed-rate and adjustable-rate mortgages are available, and you can use the loan to buy a single-family home, multi-family home, or condo.
203(k) rehabilitation mortgage: This type of FHA loan lets you finance an additional $35,000 into your home loan, to be used to fund repairs and home improvements.
245(a) graduated payment mortgage: The FHA insures mortgages where the monthly payment gradually increases. These loans are designed for low-income buyers who expect their incomes to rise over time.
Energy-efficient mortgage: An FHA energy-efficient mortgage provides funding that helps homeowners install energy-efficient improvements to their homes, thereby lowering their utility costs.
Reverse mortgage: The FHA also allows homeowners over the age of 62 to take out a home equity conversion mortgage (HECM), or reverse mortgage. This type of mortgage provides a way for homeowners to borrow against the equity in their home.

There are also FHA refinance loans that can help you refinance your mortgage and secure a new interest rate and terms.

Pros and cons of FHA loans

An FHA loan might not be the right fit for every situation. Consider the pros and cons below. Keep in mind, too, that while many first-time homebuyers choose an FHA loan for the flexible credit requirements and low down payment options, borrowers with good credit may find FHA loans to be more expensive than a conventional mortgage.

Pros	Cons
Low down payment options	Mortgage insurance premiums required
More lenient credit requirements	More stringent property requirements
Can add a co-borrower to the mortgage	Lower loan limits (outside of high cost of living areas)
No income limits	Must occupy the home as a primary residence

“FHA loans offer a lower barrier to home ownership with relaxed down payment and credit requirements. Be prepared to navigate extra hurdles such as mortgage insurance,” says Mike Schmidt, a senior manager at Credible with 20 years of experience in the mortgage industry.

Disclosure: Depending on loan type, different lenders in the United States offer loans to consumers with credit scores as low as 620, 580, or even 500. Lenders listed in the Advertisements that appear in this article are unlikely to offer loans for consumers with credit scores below 620.

FAQ

What is an FHA in simpler terms?

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Simply stated, an FHA loan is a government-insured mortgage you can get through a bank or lender. The Federal Housing Administration insures the loan, which gives lenders the freedom to accept borrowers who might otherwise not qualify for a home loan. FHA loans make buying a home more accessible for more people.

What is an FHA in simpler terms?

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Why would someone want an FHA?

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FHA loans have more lenient credit requirements, making them a good choice for borrowers with fair credit. These loans also have low down payment requirements — as low as 3.5% — which means you buy a home without saving up 20% of the purchase price first. First-time homebuyers who have less money for a down payment or lower credit scores may find that getting an FHA loan is their best option.

Do you get money back from an FHA loan?

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It is possible to get money back from an FHA loan, depending on the type of loan. For example, a 203(k) rehabilitation loan is a type of FHA loan that lets you get back up to $35,000 in additional financing. You can then use those funds to make repairs, improvements, and upgrades to your home. Another type of FHA loan that gives you money back is an HECM. This kind of reverse mortgage is designed to provide seniors over the age of 62 with the option to tap the equity in their home without selling it.

Who qualifies for an FHA loan?

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You may qualify for an FHA loan even if you don’t qualify for a traditional mortgage. Because FHA loans are backed by the government, you can apply for this home loan even if you have a credit score lower than 620 (the minimum for many conventional mortgages). The Federal Housing Administration sets the guidelines for FHA loans.

What happens if my FHA application gets rejected?

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More than 14% of FHA loan applications were denied in 2022, according to a study conducted by the Consumer Financial Protection Bureau. Even though FHA loans have more lenient credit requirements than conventional loans, that doesn’t mean you’ll be automatically approved. The lender will still want to make sure that your credit history shows you would be a good borrower, and they may reject your application if your finances and/or the property do not meet their requirements. If your FHA application is rejected, the lender must notify you with a lender’s notice of denial. You can then see why your application was rejected, and take steps to either work with a different lender or make financial changes so that your application can be approved.

Meet the expert:

Mary Beth Eastman