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The FHA Loan: Benefits, Qualifications, and Application Process

Written by:  

Marianne Hayes

Marianne Hayes

Marianne Hayes

Personal Finance Writer

Marianne is a contributing writer for Own Up.

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Fact Checked by:  

Dan Silva

Dan is the Vice President of Marketplace Lending at Own Up. Throughout his career, he has held executive leadership positions in the mortgage and banking industry.

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An American flag on a porch

There’s more to buying a home than just finding a property and making an offer. Unless you’re paying in cash, you’ll also need to secure a mortgage. That involves finding a lender and choosing a home loan.

Enter the FHA loan – a government-backed mortgage with low down payment requirements. This type of mortgage can be a good option for first-time homebuyers and those with less-than-perfect credit, but there are potential drawbacks to consider. From benefits to the application process, here's everything you need to know about securing an FHA loan.

How Does an FHA Loan Work?

An FHA home loan is a mortgage that’s guaranteed by the Federal Housing Administration (FHA). That makes it a government-insured mortgage. As such, lenders who provide FHA loans can require lower down payments. Credit qualifications can also be looser when compared to a conventional mortgage. That can be good news for first-time homebuyers – especially those who don’t have a 20% down payment in the bank.

See What You Qualify For

What Are the Benefits of an FHA Loan?

An FHA loan could open the door to homeownership. Here are some of the main advantages:

A Low Down Payment

Saving a down payment can be a real hurdle for first-time homebuyers. The median price of a home in the United States is $391,800, according to the National Association of Realtors. At this price, a 20% down payment would work out to more than $78,000. FHA loans allow for a minimum down payment of just 3.5%.

Low Credit Score Requirements

To qualify for a conventional loan, you’ll likely need a credit score of at least 620 – though it can be as high as 680 or 700. FHA loans are much more flexible. You could get approved with a credit score of 580 or even lower, depending on your down payment amount, according to Yahoo! Finance.

Debt Load Flexibility

One thing mortgage lenders consider is your debt-to-income ratio (DTI), which tells them how much of your monthly income is going toward debt payments. Conventional loan lenders prefer a DTI that’s below 43%. With an FHA loan, your DTI could be as high as 57%.

Downsides of an FHA loan

These types of home loans aren’t for everyone. Consider the following details before filling out an FHA loan application.

Mortgage Insurance Premiums

Even if you make a large down payment, FHA loans require a mortgage insurance premium (MIP). This is an upfront fee of around 1.75% of the loan amount – plus an extra fee that’s tacked onto your monthly mortgage payments. If your down payment is more than 10%, your MIP should expire after 11 years.

Refinancing Costs

Refinancing to a conventional loan is one way to get rid of your MIP. Just keep in mind that you’ll be on the hook for private mortgage insurance (PMI) if you have less than 20% equity in your home. Getting to that threshold may require you to stay with an FHA loan for years.

Lower Loan Amounts

The FHA updates its loan amounts annually. In 2024, the maximum amount for a single-family home in most parts of the United States is $498,257, though limits are higher in more expensive areas. Conventional loans allow qualifying borrowers to finance more. That could create a roadblock if an FHA loan falls short of your funding needs. Check with your county to find out your FHA loan limits.

What Are FHA Loan Requirements?

Borrowers must meet the following requirements to qualify for an FHA loan:

  • The home must be your primary residence. That means you can’t take out an FHA loan to finance a vacation home or investment property.
  • You must move in within 60 days of closing.
  • The home must meet FHA appraisal and inspection requirements.
  • You must have a minimum credit score of 580.
  • Your down payment must be at least 3.5%.

What are the First Steps to Getting an FHA Loan?

Before you start looking for a lender, you’ll want to make sure you’re financially ready to buy a home. Here are some ways to get your financial house in order before applying for a home loan:

Save Your Down Payment

With an FHA loan, you could become a homeowner with a smaller down payment – but you’ll still need to save at least 3.5%. Revisit your budget to see if there are any expenses you can reduce or eliminate. Canceling unused subscriptions, doing away with cable, and switching phone and internet providers could bring down your costs. You can redirect those savings toward your down payment fund. Keeping your money in a high-yield savings account can help bump up your efforts. Here are some other tips for saving your down payment:

  • Find ways to increase your income. Maybe that means picking up a side gig or negotiating a raise.
  • Put cash windfalls like tax refunds toward your down payment.
  • Move to a more affordable area or consider living with roommates to reduce your housing costs.
  • Save on gas by carpooling or taking public transportation.

Get Your Credit Score Ready

Strengthening your credit is always a smart financial move. To qualify for an FHA loan, you’ll need a minimum credit score of 580. Here are some tips for improving your credit:

  • Pay your bills on time. Your payment history makes up 35% of your FICO Score. Avoid late payments by prepping your budget and putting your bills on autopay.
  • Pay down debt. Carrying too much debt can increase your debt-to-income ratio and make it harder to qualify for a mortgage loan.
  • Refinance high-interest debt. By consolidating multiple balances, you could secure a lower interest rate – which can save you money in the long run. And you’ll only have one monthly payment to worry about.
  • Team up with a financial professional. If you feel overwhelmed by debt, consider partnering with a financial advisor or non-profit credit counselor. They can help you make a debt-payoff plan that works for you.

A Closer Look at the FHA Loan Application

Once you feel confident that you meet the eligibility criteria, you’re ready to begin the FHA loan application process. Let’s get started:

1. Look for Lenders

To find an FHA-approved lender, start with the Department of Housing and Urban Development (HUD) lender list. Also look at online reviews and compare multiple lenders before making a final decision. You want a lender that has a strong track record and is easy to work with.

2. Get Pre-approved

This is the step you take before formally applying for a home loan. Getting a mortgage pre-approval letter will tell you how much a lender is prepared to loan you—and at what interest rate. You’ll likely need to verify your income and employment history, provide proof of financial assets, and disclose your debts. Gathering up your pay stubs, bank statements, and tax returns can save you time.

3. Apply for an FHA Loan

After comparing pre-approval letters and choosing a lender that feels like the best fit, you’re ready to complete your loan application. The process should be similar to getting preapproved.

What Will Disqualify You From an FHA Loan?

Failing to meet the eligibility requirements could put an FHA loan out of reach. If things don’t go as planned, consider taking time to strengthen your finances before reapplying. You might work on improving your credit or saving for a larger down payment. In the future, you may qualify for a conventional loan with lower down payment requirements.

The Bottom Line

FHA loans can be a great mortgage option, especially for buyers with smaller down payments or below-average credit. They come with additional fees, but the cost may be worth it if it gets you into a home. You could always refinance to a conventional mortgage at a later point, though you’ll have to cover closing costs. Consider an FHA loan as another potential resource on your way to homeownership.

See What You Qualify For

See What You Qualify For


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