Federal Housing Administration (FHA) Loan: Requirements, Limits, How to Qualify

What Is a Federal Housing Administration (FHA) Loan?

A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required.

The FHA loan is designed to help low- to moderate-income families attain homeownership. They are particularly popular with first-time homebuyers.

How Does an FHA Loan Work?

If you have a credit score of at least 580, you can borrow up to 96.5% of the value of a home with an FHA loan, as of 2022. That means the required down payment is only 3.5%.

If your credit score falls between 500 and 579, you can still get an FHA loan as long as you can make a 10% down payment.

With FHA loans, the down payment can come from savings, a financial gift from a family member, or a grant for down payment assistance.

The Bank's Role in an FHA Loan

The FHA doesn't actually lend anyone money for a mortgage. The loan is issued by a bank or other financial institution that is approved by the FHA.

The FHA guarantees the loan. That makes it easier to get bank approval since the bank isn't bearing the default risk. Some people refer to it as an FHA-insured loan for that reason.

Borrowers who qualify for an FHA loan are required to purchase mortgage insurance, with the premium payments going to the FHA.

History of the FHA Loan

Congress created the FHA in 1934 during the Great Depression. At that time, the housing industry was in trouble: Default and foreclosure rates had skyrocketed, 50% down payments were commonly required, and the mortgage terms were impossible for ordinary wage earners to meet. As a result, the U.S. was primarily a nation of renters, and only one in 10 households owned their homes.

The government created the FHA to reduce the risk to lenders and make it easier for borrowers to qualify for home loans.

The homeownership rate in the U.S. steadily climbed, reaching an all-time high of 69.2% in 2004, according to research from the Federal Reserve Bank of St. Louis. In the second quarter of 2023, the rate stood at 65.9%.

Types of FHA Loans

In addition to traditional mortgages, the FHA offers several other home loan types.

Home Equity Conversion Mortgage (HECM)

This is a reverse mortgage program that helps seniors ages 62 and older convert the equity in their homes to cash while retaining the home's title. The homeowner can withdraw the funds in a fixed monthly amount, a line of credit, or a combination of both.

FHA 203(k) Improvement Loan

This loan factors the cost of certain repairs and renovations into the amount borrowed. It's great for those willing to buy a fixer-upper and put some sweat equity into their home.

FHA Energy Efficient Mortgage

This program is similar to the FHA 203(k) improvement loan program, but it’s focused on upgrades that can lower your utility bills, such as new insulation or solar or wind energy systems.

Section 245(a) Loan

This program works for borrowers who expect their incomes to increase. The Graduated Payment Mortgage (GPM) starts with lower monthly payments that gradually increase over time. The Growing Equity Mortgage (GEM) has scheduled increases in monthly principal payments. Both promise shorter loan terms.

What Are FHA Loan Requirements?

Your lender will evaluate your qualifications for an FHA loan as it would any mortgage applicant, starting with a check to see that you have a valid Social Security number, reside lawfully in the U.S., and are of legal age (according to your state laws).

FHA loan criteria are less rigid in some ways than a bank's loan criteria. However, there are some more stringent requirements.

Whether or not it's an FHA-guaranteed loan, your financial history will be examined when you apply for a mortgage.

Credit Scores and Down Payments

FHA loans are available to individuals with credit scores as low as 500. That is within the "poor" range for a FICO score.

If your credit score is between 500 and 579, you may be able to secure an FHA loan, assuming you can afford a down payment of 10%. Meanwhile, if your credit score is 580 or higher, you can get an FHA loan with a down payment of as little as 3.5%. 

By comparison, applicants typically need a credit score of at least 620 in order to qualify for a conventional mortgage. The down payment required by banks varies between 3% and 20%, depending on how eager they are to lend money at the time you apply.

History of Honoring Debts

A lender will look at your work history as well as your last two years of payment history on your credit report.

People who fall behind on federal student loan payments or income tax payments will be rejected unless they agree to a satisfactory repayment plan. A history of bankruptcy or foreclosure may prove problematic, too.

Typically, to qualify for an FHA loan—or any type of mortgage—at least two years must have passed since the borrower experienced bankruptcy or foreclosure, and have since then established good credit and got their financial affairs in order. However, exceptions can be made if the borrower has experienced extenuating circumstances such as serious illness.

Proof of Steady Employment

Mortgages must be repaid, and the FHA-approved lender will want assurances that the applicant can achieve this. The key to determining if the borrower can make good on their commitment is evidence of recent and steady employment.

This can be documented by tax returns and a current year-to-date balance sheet and profit-and-loss statement.

If you've been self-employed for less than two years but more than one year, you may still qualify if you have a solid work and income history in the same or a related occupation for the two years before becoming self-employed.

Sufficient Income

Your mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowners insurance should be less than 31% of your gross income. Banks call this the front-end ratio.

Meanwhile, your back-end ratio, which consists of your mortgage payment and all other monthly consumer debts, should be less than 43% of your gross income.

FHA Mortgage Insurance Premiums (MIPs)

An FHA loan requires that you pay two types of mortgage insurance premiums (MIPs)—an upfront MIP and an annual MIP, which is paid monthly. The upfront MIP is equal to 1.75% of the base loan amount.

You can either pay the upfront MIP at the time of closing, or it can be rolled into the loan. For example, if you’re issued a home loan for $350,000, you’ll pay an upfront MIP of 1.75% x $350,000 = $6,125.

These payments are deposited into an escrow account that the U.S. Treasury Department manages. If you end up defaulting on your loan, the funds will go toward the mortgage repayment.

Despite its name, borrowers make annual MIP payments every month, with the payments ranging from 0.15% to 0.75% annually of the base loan amount. The payment amounts differ depending on the loan amount, the length of the loan, and the original loan-to-value (LTV) ratio.

Let's assume you have an annual MIP of 0.55%. In that case, a $350,000 loan would result in annual MIP payments of 0.55% x $350,000 = $1,925 (or $160.42 monthly). These monthly premiums are paid in addition to the one-time upfront MIP payment. You will make annual MIP payments for either 11 years or the life of the loan, depending on the length of the loan and the LTV.

You can no longer take a tax deduction for the amount you pay in premiums. This provision expired in 2022. You can still deduct mortgage interest though. You have to itemize your deductions—rather than take the standard deduction—in order to do this.

Homes That Qualify for an FHA Loan

Usually, the property financed must be your principal residence and must be owner-occupied. In other words, the FHA loan program is not intended for investment or rental properties.

Detached and semi-detached houses, townhouses, rowhouses, and condominiums within FHA-approved condo projects are all eligible for FHA financing.

Also, you need a property appraisal from an FHA-approved appraiser, and the home must meet certain minimum standards. Homes that are in such disrepair that they do not meet the FHA's requirements are deemed uninsurable. If the home doesn’t meet these standards and the seller won’t agree to the required repairs, you must pay for the repairs at closing. (In this case, the funds are held in escrow until the repairs are made.)

What Are the Federal Housing Administration Loan Limits?

FHA loans have limits on how much you can borrow. These are set by region, with lower-cost areas having a lower limit (referred to as the "floor") than the usual FHA loan and high-cost areas having a higher figure (referred to as the "ceiling").

There are "special exception" regions—including Alaska, Hawaii, Guam, and the U.S. Virgin Islands—where very high construction costs make the limits even higher.

Elsewhere, the limit is set at 115% of the median home price for the county, as determined by the U.S. Department of Housing and Urban Development (HUD).

The chart below lists the 2023 loan limits:

Federal Housing Administration (FHA) Loan Relief

When you get an FHA loan, you may be eligible for loan relief if you’ve experienced a legitimate financial hardship such as a loss of income or an increase in living expenses. The FHA Home Affordable Modification Program (HAMP), for example, can permanently lower your monthly mortgage payment to an affordable level. However, the program has been suspended through October 30th, 2024.

When the program restarts, to become a full participant in the program, you must successfully complete a trial payment plan in which you make three scheduled payments—on time—at the lower, modified amount.

Advantages and Disadvantages of FHA Loans

FHA loans are often the best source of a mortgage for certain borrowers that are unable to obtain financing through private lenders. Thus, you may qualify for an FHA loan with a lower credit score and/or greater amounts of debt (and higher debt-to-income).

However, because FHA borrowers are often riskier, FHA loans usually come with somewhat higher interest rates and require MIPs paid both upfront and monthly. FHA loans can only be used for your primary residence and come with certain borrowing limits.

The Bottom Line

The FHA loan is a path to homeownership for people who the banks would probably otherwise reject. They may have little cash for a down payment or a less-than-stellar credit rating. They might not qualify without that government guarantee that the bank will get its money back.

However, those who can afford a substantial down payment may be better off going with a conventional mortgage. They may be able to avoid the monthly mortgage insurance payment and get a lower interest rate on the loan.

FHA loans were not created to help potential homeowners who are shopping at the higher end of the price spectrum. Rather, the FHA loan program was created to support low- and moderate-income homebuyers, particularly those with limited cash saved for a down payment.

Correction—Sept. 10, 2023: A previous version of this article misstated the type of mortgage insurance required for an FHA loan.