How FHA Loans Work: Down Payment, Insurance, and What You Actually Pay
FHA loans let you buy a home with a down payment as low as 3.5 percent of the purchase price
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. The insurance protects the lender if you stop paying, which is why FHA loans accept smaller down payments than conventional mortgages. If you put down 3.5 percent, you borrow the rest. On a $200,000 home, that means $7,000 down and a $193,000 loan.
The catch is that you pay for that insurance as part of your monthly payment and as an upfront fee. The insurance does not protect you—it protects the lender. You need to understand both costs before you decide whether an FHA loan makes sense for your situation.
Key Takeaways
- FHA loans require a down payment of 3.5 percent if your credit score is 580 or higher; some lenders require 10 percent if your score is between 500 and 579.
- You pay mortgage insurance upfront (1.75 percent of the loan amount, added to what you borrow) and monthly (0.55 to 0.80 percent of the loan annually, depending on loan size and down payment).
- The total monthly cost—principal, interest, taxes, insurance, and mortgage insurance—is usually higher than a conventional loan on the same home, even with a lower down payment.
- FHA loans have debt-to-income limits: most lenders cap your total monthly debt payments at 43 to 50 percent of your gross monthly income.
- You can remove conventional mortgage insurance after you reach 20 percent equity, but FHA mortgage insurance stays for the life of the loan if you put down less than 10 percent.
Down payment amounts and credit score requirements
The minimum down payment on an FHA loan is 3.5 percent of the home's purchase price if your credit score is 580 or higher. That score is lower than most conventional loans require, which is why FHA loans are often the first option for people rebuilding credit or saving for a first home.
If your credit score is between 500 and 579, some lenders will still work with you, but they typically require a 10 percent down payment instead. A few lenders have stopped accepting scores below 580 altogether, so you will need to call and ask. The down payment you make is yours to lose—if the sale falls through, you do not get it back, so make sure the home inspection and appraisal are complete before you hand over money.
Mortgage insurance: what it costs and how long you pay it
Mortgage insurance on an FHA loan comes in two parts: an upfront fee and a monthly payment. The upfront mortgage insurance premium (UFMIP) is 1.75 percent of the loan amount. On a $193,000 loan, that is $3,378. Most lenders roll this into your loan, so you do not pay it at closing—you borrow it and pay interest on it for 30 years.
The annual mortgage insurance premium (MIP) is charged monthly and ranges from 0.55 to 0.80 percent of the loan amount per year, depending on the size of your loan and how much you put down. On a $193,000 loan at 0.65 percent annually, that is about $125 per month. This amount does not change based on how much equity you build.
Here is the critical difference from conventional loans: if you put down less than 10 percent on an FHA loan, you pay mortgage insurance for the entire life of the loan—30 years, or however long you keep the mortgage. You cannot remove it by reaching 20 percent equity. If you put down 10 percent or more, the insurance drops after 11 years. This is a major cost difference over time and should factor into whether an FHA loan is right for you.
How the debt-to-income limit affects how much you can borrow
Lenders use your debt-to-income ratio (DTI) to decide how much to lend you. This is your total monthly debt payments divided by your gross monthly income. Most FHA lenders cap your DTI at 43 percent, meaning if you earn $4,000 a month, your total debt payments (car loans, credit cards, student loans, and the new mortgage payment) cannot exceed $1,720.
Some lenders will go up to 50 percent DTI if you have a strong credit history, a large down payment, or savings set aside. But 43 percent is the standard. This limit often matters more than the 3.5 percent down payment—it determines whether you can actually afford the home you want to buy, regardless of how little you put down.
Comparing FHA and conventional loans on the same home
An FHA loan and a conventional loan on the same $200,000 home will have different total monthly costs. Here is what that looks like in practice:
| Loan Type | Down Payment | Loan Amount | Mortgage Insurance | Est. Monthly P&I | Est. Monthly MI | Total (P&I + MI) |
|---|---|---|---|---|---|---|
| FHA (3.5% down) | $7,000 | $196,378 (includes UFMIP) | 0.65% annually | $1,050 | $106 | $1,156 |
| Conventional (5% down) | $10,000 | $190,000 | 0.50% annually | $1,015 | $79 | $1,094 |
| Conventional (20% down) | $40,000 | $160,000 | None | $855 | $0 | $855 |
These are estimates using a 7 percent interest rate and do not include property taxes, homeowners insurance, or HOA fees. The point is that the FHA loan's lower down payment does not automatically mean a lower monthly payment. You are borrowing more, paying insurance longer, and the total cost can exceed a conventional loan with a slightly higher down payment. Run the numbers with an actual lender before you decide.
Other FHA loan rules you need to know
The home must be your primary residence—you cannot use an FHA loan to buy an investment property or a vacation home. The property must also pass an FHA appraisal, which is stricter than a standard appraisal. The home must be safe, structurally sound, and free of major hazards. If the appraisal fails, the seller has to fix the problems or you walk away.
You also cannot have a foreclosure in the past three years (some lenders require five years), and you cannot be currently in bankruptcy. If you have had a bankruptcy, most lenders want to see two years of clean payment history after discharge. These rules exist because FHA insurance is backed by taxpayer money, so the government sets stricter standards than private lenders do.
When an FHA loan makes sense and when it does not
An FHA loan is useful if you have a credit score below 620, limited savings for a down payment, or you are a first-time buyer with a smaller income. The 3.5 percent down payment requirement is real relief when you do not have $20,000 or $30,000 saved.
An FHA loan is less useful if you have good credit, can save 10 to 15 percent down, and plan to stay in the home for many years. A conventional loan with a higher down payment will cost you less over time because you avoid the lifetime mortgage insurance. If you are on the edge—say, you have 7 percent saved and decent credit—get quotes from both an FHA lender and a conventional lender. The math will tell you which one costs less.
Frequently Asked Questions
Can I get an FHA loan if I have had a bankruptcy?
Yes, but most lenders require two years of clean payment history after your bankruptcy is discharged. Some lenders require three years. You will need to explain what caused the bankruptcy and show that your finances are now stable. Call several lenders—requirements vary.
What happens if the home appraisal comes back lower than the purchase price?
You have three choices: renegotiate the price with the seller, make up the difference in cash at closing, or walk away. If you walk away, you lose your earnest money deposit. This is why the appraisal happens early—before you are locked in.
Can I remove FHA mortgage insurance early?
Only if you put down 10 percent or more; then it drops after 11 years. If you put down 3.5 percent, you pay it for the life of the loan. You cannot refinance into a conventional loan to remove it unless you have built 20 percent equity and your credit and income still may have access to.
Do I have to use an FHA loan if I have a low credit score?
No. Some credit unions and community banks offer conventional loans to borrowers with scores in the 580 to 620 range, though the interest rate will be higher and the down payment requirement larger. Compare offers before you assume FHA is your only option.
What is the maximum home price I can buy with an FHA loan?
The limit varies by county and changes yearly. In most areas it is between $400,000 and $800,000. Your local FHA office or any FHA lender can tell you the limit for your county. The real limit, though, is your debt-to-income ratio—that usually stops you before the price cap does.