How FHA Loans Work and What Down Payment You'll Need

FHA loans require a down payment as low as 3.5 percent of the home's purchase price

An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. The main difference from a conventional loan is that FHA loans accept lower down payments and are more forgiving about credit scores and debt. Instead of putting down 10 to 20 percent, you can buy a home with as little as 3.5 percent down. The tradeoff is that you pay mortgage insurance premiums — both upfront and monthly — which protect the lender if you stop paying.

The 3.5 percent figure is the minimum. Some borrowers put down 5, 10, or more percent. The less you put down, the higher your monthly insurance cost, but the less cash you need on closing day. If you have saved $10,000 and want to buy a $200,000 home, an FHA loan lets you do it; a conventional loan would require $20,000 to $40,000 down.

Key Takeaways

• FHA loans allow down payments as low as 3.5 percent, meaning you can buy a $200,000 home with $7,000 down instead of $20,000 or more.
• You must pay an upfront mortgage insurance premium (usually 1.75 percent of the loan amount) at closing, which can be rolled into your loan balance.
• You also pay an annual mortgage insurance premium each month, which varies based on your down payment and loan size but typically ranges from 0.55 to 0.80 percent of the loan annually.
• FHA loans require a credit score of at least 580 to may have access to for the 3.5 percent down payment; scores between 500 and 579 may may have access to but require 10 percent down.
• The property must be your primary residence, and you cannot use an FHA loan to buy investment properties or vacation homes.

How the down payment and closing costs work together

When you buy a home with an FHA loan, you need cash for two things: the down payment and closing costs. The down payment is your 3.5 percent (or more) of the purchase price. Closing costs — which include the appraisal, title search, inspection, and lender fees — typically run 2 to 5 percent of the loan amount and are separate from the down payment.

Here is where FHA loans differ from conventional ones: the seller or lender can pay some or all of your closing costs. This is called a seller concession. On an FHA loan, the seller can contribute up to 6 percent of the purchase price toward your closing costs and down payment combined. If you are buying a $200,000 home, the seller could contribute up to $12,000. This means you might walk into closing with very little cash out of pocket, though you still owe the mortgage insurance premiums.

The upfront mortgage insurance premium (called the UFMIP) is 1.75 percent of your loan amount. Most borrowers roll this into the loan itself rather than paying it in cash at closing. So if you borrow $193,000, you add $3,378 to your loan balance. This increases your monthly payment slightly but means you do not need to bring extra cash to closing.

Mortgage insurance: what you pay monthly and for how long

After you close, you pay annual mortgage insurance premiums each month as part of your mortgage payment. The amount depends on two things: how much you put down and the size of your loan. If you put down 3.5 percent, you typically pay between 0.55 and 0.80 percent of your loan balance per year, divided into 12 monthly payments. On a $200,000 loan, that is roughly $92 to $133 per month.

The insurance stays on your loan for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more, the insurance drops off after 11 years. This is an important difference: a 3.5 percent down payment means you pay insurance for 30 years (the full loan term), while a 10 percent down payment means you pay for only 11 years.

You cannot remove the insurance early by refinancing into a conventional loan, though some borrowers do refinance once their home value rises or their credit improves. Refinancing costs money upfront, so it only makes sense if you plan to stay in the home long enough to recoup those costs through lower payments.

Credit score and debt requirements for FHA loans

FHA loans are more flexible than conventional loans, but they still have minimums. You need a credit score of at least 580 to put down 3.5 percent. If your score is between 500 and 579, you can still get an FHA loan, but you must put down 10 percent instead of 3.5 percent.

Lenders also look at your debt-to-income ratio, which is the percentage of your monthly income that goes to debt payments. Most FHA lenders want this ratio to be 43 percent or lower, though some will go as high as 50 percent if you have strong compensating factors (like a large savings account or a history of on-time payments). If you earn $4,000 per month and already pay $1,200 in car loans, credit cards, and student loans, your ratio is 30 percent — you have room for a mortgage payment of about $520 before hitting 43 percent.

Recent late payments, collections, or foreclosures can disqualify you or require a waiting period. Most lenders want to see at least two years since a foreclosure and one year since a short sale. Late payments on credit cards or loans are less serious if they are old and your recent history is clean.

Loan limits and property requirements

FHA loans have maximum amounts you can borrow, and these limits change each year and vary by county. In 2024, the limit for a single-family home ranges from about $440,000 in low-cost areas to over $1 million in high-cost urban areas. Your lender can tell you the limit for your county.

The property itself must meet FHA standards. It has to be your primary residence — the place you live most of the year. You cannot use an FHA loan to buy a second home, vacation property, or investment rental. The home must pass an FHA appraisal, which is more thorough than a standard appraisal. The appraiser checks that the property is safe, structurally sound, and worth the price you are paying. If the home fails inspection (for example, the roof is failing or the foundation is cracked), you cannot close until those issues are fixed.

When an FHA loan makes sense versus other options

An FHA loan is most useful if you have limited savings, a lower credit score, or higher existing debt. The 3.5 percent down payment is the lowest available for mortgages backed by a government agency. Conventional loans typically require 5 to 20 percent down, and VA loans (for military members) require zero down but are only for veterans.

The tradeoff is mortgage insurance. On a conventional loan with 5 percent down, you also pay insurance, but it can be removed once you have 20 percent equity in the home. On an FHA loan with 3.5 percent down, the insurance is permanent. Over 30 years, this adds up. However, if you cannot save 20 percent down, the FHA option lets you buy now instead of waiting years to save.

Some borrowers use an FHA loan as a stepping stone. They buy a modest home with 3.5 percent down, build equity and improve their credit over a few years, then refinance into a conventional loan to remove the insurance. This works only if your home value rises or your income increases enough to support a conventional loan payment.

The application process and timeline

Getting an FHA loan starts with finding a lender — a bank, credit union, or mortgage company. Not all lenders offer FHA loans, so ask specifically. Once you have chosen a lender, you will provide pay stubs, tax returns, bank statements, and a list of debts. The lender pulls your credit report and calculates your debt-to-income ratio.

Next comes the pre-approval letter, which tells you how much you can borrow. This letter is not a may provide, but it shows sellers you are serious. Once you find a home and make an offer, the lender orders an appraisal. If the appraisal comes back lower than the purchase price, you have options: renegotiate the price, pay the difference in cash, or walk away. The appraisal also checks that the home meets FHA safety standards.

From application to closing typically takes 30 to 45 days, depending on how quickly you provide documents and how busy the lender is. During this time, do not make large purchases, open new credit accounts, or change jobs — these things can affect your approval.

Frequently Asked Questions

Can I use an FHA loan to buy a condo or townhouse?

Yes, but the building must be FHA-approved. This means the complex meets certain standards for maintenance, insurance, and owner occupancy. Your lender will check this during the appraisal. Some older or poorly maintained condos are not FHA-approved, which can block your purchase even if you have an FHA loan.

What happens if I put down more than 3.5 percent?

Your monthly mortgage insurance premium goes down. If you put down 5 percent instead of 3.5 percent, your insurance cost drops. If you put down 10 percent or more, the insurance expires after 11 years instead of lasting the full loan term. The tradeoff is that you need more cash upfront.

Can I remove the mortgage insurance if my home value goes up?

Not on an FHA loan. Unlike conventional loans, FHA mortgage insurance cannot be removed by building equity or refinancing within the FHA program. Your only option is to refinance into a conventional loan once you have enough equity and your credit qualifies, but this involves new closing costs and a new application.

Do I need a down payment saved before I apply?

You do not need the full amount saved before pre-approval, but you will need to show proof of funds before closing. Lenders want to see that your down payment comes from your own savings, not from a loan. Gifts from family are allowed if the giver signs a gift letter stating it does not need to be repaid.

What if my credit score is below 580?

You cannot get an FHA loan with a score below 500. If your score is between 500 and 579, you can still borrow, but you must put down 10 percent instead of 3.5 percent. If your score is below 500, you will need to wait and rebuild your credit before applying.