The Federal Housing Administration (FHA) does not make loans. It insures them, which protects approved lenders if a borrower defaults. Because of that insurance, lenders can offer more flexible terms than they might on a loan with no backing, such as smaller down payments and more room for imperfect credit. FHA loans are especially popular with first-time buyers, but anyone who meets the requirements can use one to buy or refinance a primary residence. Bethany Sanchez (NMLS #2425491) helps Scottsdale buyers decide whether FHA is the right fit.
Quick answer: An FHA loan allows a low down payment and flexible credit standards in exchange for mortgage insurance premiums that you pay upfront and monthly. It is for owner-occupied homes with one to four units. This page is educational and is not a commitment to lend.
Who FHA loans tend to fit
FHA financing can be a strong option if you:
- Have limited savings for a down payment
- Have a credit score or history that makes conventional approval harder
- Carry higher debt payments relative to your income than conventional guidelines prefer
- Plan to buy a one- to four-unit home and live in one unit
- Have a non-occupying co-borrower, such as a parent, helping you qualify
- Are rebuilding after a bankruptcy or foreclosure and the waiting period has passed
It may be less attractive if you have a large down payment and strong credit, because conventional financing may cost less over the life of the loan.
Core FHA requirements
Specific rules change, but these are the standard categories.
| Category | General FHA approach |
|---|---|
| Down payment | A minimum applies, with a larger minimum for lower credit scores |
| Credit | Flexible compared with many programs, though lenders may add stricter standards |
| Debt-to-income | Automated underwriting can allow higher ratios when other factors are strong |
| Occupancy | Primary residence only |
| Property | One to four units that meet HUD minimum property standards |
| Loan limits | Set by county, with higher limits in high-cost areas |
| Employment | Typically a two-year history, with documented, stable income |
| Gift funds | Allowed from acceptable donors, with documentation |
| Seller contributions | Sellers can contribute toward closing costs, within a program limit |
FHA mortgage insurance
Mortgage insurance is the main trade-off. FHA charges two kinds:
- Upfront mortgage insurance premium (UFMIP). A one-time premium based on the loan amount. Most borrowers finance it into the loan rather than paying cash at closing.
- Annual mortgage insurance premium (MIP). An ongoing premium that is divided into monthly payments. The percentage depends on the loan amount, the loan term and your down payment.
How long you pay the annual premium depends on your down payment at closing. With a smaller down payment, the premium generally lasts for the life of the loan. With a larger down payment it can drop off after a set number of years. If you plan to stay in the home for a long time, compare the total cost with a conventional loan, which can drop private mortgage insurance when you build enough equity.
The FHA appraisal and property standards
FHA appraisals evaluate market value and also check that the home meets minimum health, safety and structural standards. Peeling paint in an older home, a missing handrail, a failing roof or active leaks can all trigger repairs before closing. That does not mean FHA cannot be used for older homes. It means your agent and inspector should know what to look for, and the seller may be asked to fix certain items. Some borrowers choose a renovation product, such as the FHA 203(k) loan, to finance repairs along with the purchase.
Costs to plan for
- Down payment as required by your credit and program
- Closing costs, including lender fees, appraisal, title, escrow and prepaid taxes and insurance
- Upfront mortgage insurance premium, usually financed
- Monthly mortgage insurance premium
- Homeowners insurance and property taxes
- Repairs that the appraisal requires
Sellers can often contribute toward closing costs, and gift funds can be used for the down payment and closing costs with proper documentation. Down payment assistance can also be paired with FHA loans in many programs.
Refinancing with FHA
If you already have an FHA loan, an FHA streamline refinance can reduce paperwork and sometimes skip the appraisal when the refinance results in a net tangible benefit. FHA cash-out refinances are also available for eligible homeowners, within loan-to-value limits. Talk with us before you assume that refinancing makes sense, because closing costs and mortgage insurance can offset savings.
Pros and cons at a glance
Advantages
- Low down payment option
- Flexible credit standards
- Gift funds and seller contributions allowed
- Co-borrower flexibility
- Often accepts higher debt-to-income ratios
- Assumable, subject to lender approval
Considerations
- Mortgage insurance costs, both upfront and monthly
- Mortgage insurance can last for many years
- Loan limits can be lower than conventional limits in some areas
- Property must meet FHA standards
- Primary residence only
How to get started with an FHA loan
- Talk to us. We review your income, credit, savings and goals and tell you whether FHA is a good match.
- Gather documents. Typical items include ID, pay stubs, W-2s or tax returns and bank statements. See our Get Pre-Approved page for the full list.
- Get pre-approved. A pre-approval helps you shop with confidence.
- Find a home with an agent. Make sure your agent knows you are using an FHA loan so they can write the offer correctly.
- Complete the application and close. We guide you through the appraisal, underwriting and closing.
For a broader comparison of programs, read our first-time homebuyer guide or the loan programs overview. Sunset Home Lending is not a government agency and is not endorsed by HUD or the FHA. Reach us at (760) 713-3814.
Frequently asked questions
What is the minimum down payment for an FHA loan?
FHA guidelines allow 3.5% down for borrowers whose credit scores meet the program's minimum, and a larger down payment of 10% for borrowers with lower scores. The down payment can come from savings, a gift or an approved assistance program.
What credit score do I need for an FHA loan?
FHA guidelines allow scores in the 500s with a larger down payment and scores of 580 or higher for the lowest down payment, but many lenders require higher scores than the minimum. Ask us what we can offer based on your full file, since income, debts and history matter as well as the score.
How long do I pay FHA mortgage insurance?
It depends on your down payment. In general, borrowers who put less than 10 percent down pay the annual premium for the life of the loan, and borrowers who put down 10 percent or more pay it for 11 years. Some borrowers refinance into a conventional loan once they have enough equity. Confirm the rules for your loan at application.
Can I use an FHA loan to buy a duplex?
Yes. FHA loans can finance one- to four-unit properties as long as you plan to live in one of the units as your primary residence. The rental income from the other units may help you qualify under certain conditions. Loan limits are higher for multi-unit properties.
Are FHA loans assumable?
Generally yes, FHA loans are assumable with lender approval, which means a qualified buyer may take over the existing loan terms. That can be an advantage when you sell, but the buyer must qualify, and the seller's lender must approve the assumption.
Is an FHA loan better than a conventional loan?
Neither is better in every case. FHA can help buyers with smaller down payments or less-than-perfect credit, while conventional loans often cost less over time for borrowers with strong credit because private mortgage insurance can be canceled. We compare both using your numbers. See our conventional loans guide.