If you’re thinking about buying a home or are in the early stages of shopping around with lenders, you might’ve heard about an FHA loan. With low down payment and looser credit score requirements, FHA loans are a popular path to homeownership. You might even be wondering if it beats the more common conventional loan.
FHA loans can help borrowers who wouldn’t otherwise qualify for a mortgage, but they come with tradeoffs that warrant a closer look. For example, rates are often slightly lower than conventional loans, but higher mortgage insurance premiums can offset those savings.
If you’re confused about whether an FHA loan is the right choice for you, keep reading. This guide breaks down how FHA loans work, what they actually cost across different borrower profiles, and how they stack up against alternatives — so you can choose the right mortgage for your situation.
What is an FHA loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. The FHA doesn't issue loans directly — you apply through private lenders like banks, credit unions, and online mortgage companies. Because the government covers lenders against default, they can offer more flexible qualifying standards than conventional loans require. Borrowers pay for that insurance through premiums: one upfront at closing, and one monthly as part of their payment.
FHA loans are popular with first-time buyers for their low down payment requirement — just 3.5% — and more lenient credit criteria, though repeat buyers purchasing a primary residence can use them too. They're the second most common loan type behind conventional loans, accounting for about 35% of loan applications in the first part of 2026, according to the Mortgage Bankers Association.[1]
Types of FHA loans
A few different types of FHA loans exist that you can potentially choose from, depending on your goal:
- FHA purchase loan (203(b)):[2] This is the basic FHA loan that you apply for when purchasing a primary residence. Both first-time and repeat home buyers can apply for this loan type. To get this FHA loan, you’ll apply through a private lender, and HUD will insure the loan.
- 203(k) renovation loan:[3] Combines a home purchase and renovation costs into one loan — useful for older homes or fixer-uppers that may not meet FHA appraisal standards. The limited version finances up to $75,000 in improvements; the standard version requires at least $5,000 in repairs.
- FHA streamline refinance:[4] A simplified refinance option for existing FHA borrowers, with reduced documentation and underwriting requirements. The refinance must demonstrably benefit the borrower under FHA guidelines.
- FHA cash-out refinance:[5] With this type of refinance, you can tap your home equity and use it for other financial purposes. It works by replacing your original FHA loan with a new, larger loan, allowing you to pocket the difference. You don't need a current FHA loan to qualify for this option.
Current FHA mortgage rates
As of April 2, 2026, FHA loan rates are 6.44%, according to Bankrate.[6] — slightly below the 6.57% average for 30-year fixed conventional mortgages. [7] While that's well off the 7.5% highs of 2023, rates remain elevated compared to the 2–3% lows of 2020–2022.[8]
FHA loan rates tend to slightly lower than conventional loan rates, thanks to government backing. However, FHA loans aren’t always cheaper. For borrowers with high credit scores, the FHA mortgage insurance premiums can often erase the rate savings.
FHA loan requirements
FHA loans come with more flexible qualifying standards.[9][10][11] Because of this, FHA loans are often more appealing to first-time home buyers, borrowers with lower credit scores, and buyers with a smaller down payment, says Charlie Wilson, executive loan officer at Best Interest Financial. Here's what you need to qualify:
- Credit score: The FHA requires a minimum credit score of 580 with 3.5% down, but drops it to 500 with 10% down. Individual lenders may set stricter overlays, often requiring a score of 620 or 640.
- Down payment: You can get an FHA loan with as little as 3.5% down with a credit score of at least 580. With a score of 500-579, you’ll need to make a 10% down payment. Unlike other government-backed loan options, you can’t get an FHA loan for 0% down. However, you can use down payment assistance and gift funds to supplement your down payment.
- DTI: Your debt-to-income (DTI) ratio measures your monthly debt obligations against your gross income. The standard DTI maximum is set at 43%, but can go up to 50% or higher with compensating factors like strong credit or cash reserves. For borrowers carrying significant debt, this flexibility can be the difference between approval and rejection.
- Loan limits: For 2026, FHA loan limits are $541,287 in low-cost areas and $1,249,125 in high-cost areas. The low-cost limit falls below the conventional loan ceiling, which may be a constraint in pricier markets.
- Property requirements: FHA-financed homes must meet minimum safety and habitability standards verified at appraisal. Issues with older homes can delay or derail a closing if not addressed.
- Occupancy: FHA loans are for primary residences only. Unlike conventional loans, they can't be used for second homes or investment properties.
“The most common misconception of FHA mortgages that buyers have is the assumption that they will not qualify,” says Wilson. “In today's market, I’m finding it’s easier to qualify for an FHA mortgage than it is to meet most landlord requirements for rentals.”
What would my payment look like on an FHA loan?
“With an FHA mortgage, a higher credit score has less impact on the overall cost compared to conventional loans because pricing is more standardized through the Federal Housing Administration,” says Wilson. “Mortgage insurance costs are largely the same regardless of whether your credit is good or excellent.”
That said, let’s compare three scenarios of borrowers with different financial profiles buying a $400K home to see how their monthly payments on a 30-year FHA loan with a 6% interest rate would differ.
| Borrower A | Borrower B | Borrower C | |
|---|---|---|---|
| Credit score | 600 | 720 | 660 |
| DTI | 43% | 36% | 40% |
| Down payment | 3.5% | 10% | 5% |
| Base loan amount | $386,000 | $360,000 | $380,000 |
| Loan amount (including UFMIP) | $392,755 | $366,300 | $386,650 |
| Principal and interest | $2,355 | $2,196 | $2,318 |
| Monthly MIP[10] | $177 (0.55% rate) | $150 (0.50% rate) | $158 (0.50% rate) |
| Homeowners insurance | $300 | $300 | $300 |
| Property taxes | $100 | $100 | $100 |
| Total monthly payment | $2,932 | $2,746 | $2,876 |
Borrower B's higher down payment drives the lowest total monthly payment — but notably, even a 5% down payment qualifies for the lower 0.50% monthly MIP rate, compared to the 0.55% rate that comes with the minimum 3.5% down.
Wilson offers a useful rule of thumb for estimating the impact of your down payment: “For every additional $10,000 in down payment, your monthly payment decreases by roughly $60–$75, depending on your interest rate and loan terms.”
Your actual figures will vary by lender and financial profile. Use our FHA loan calculator to run your own estimate.
FHA Loan Calculator
Estimate your monthly FHA payment including upfront & annual mortgage insurance premiums (MIP).
How does mortgage insurance work on an FHA loan?
No matter what down payment size you make on an FHA loan, you’ll have to pay mortgage insurance premiums or MIP. There are two types of MIP you must pay:
- Upfront MIP (UFMIP): This one-time cost, charged at closing, amounts to 1.75% of the loan total. Typically, it’s rolled into the loan balance. For example, on a $350,000 loan, the UFMIP would add $6,125 to the balance, making the loan total $356,125.
- Annual MIP: Paid monthly, the FHA annual mortgage insurance premium ranges from 0.15–0.75% of the loan amount depending on the term, LTV ratio, and loan size. Under HUD guidelines, on a $350,000 home with 3.5% down (base loan of $337,750), the annual MIP rate is 0.55% — about $155 per month added to your payment.[10] That means, you’d pay an extra $155 in MIP on top of your regular mortgage payment per month.
How long you pay MIP depends on your down payment. Put down less than 10%, and MIP stays for the life of the loan. Put down 10% or more, and it drops off after 11 years.[10] The only other way to eliminate it is to refinance into a conventional loan — ideally once you've reached 20% equity, at which point you can also avoid paying private mortgage insurance (PMI) on the new loan.
“With an FHA loan, the UFMIP — set by the Federal Housing Administration — is typically financed into the loan rather than paid out of pocket,” says Wilson. “As a result, in an apples-to-apples comparison for the same home, the total loan amount on an FHA mortgage is usually higher than on a conventional loan, since the financed UFMIP is added to the base loan balance.”
FHA loan vs. other loan types
FHA loans are one of four main mortgage types alongside conventional loans and other government-backed options like VA and USDA loans. Here’s how they compare.
| Loan type | Credit score minimum | Down payment minimum | Mortgage insurance | Eligibility restrictions |
|---|---|---|---|---|
| Conventional loan[12][13] | 620 | 3-5% depending on program and fixed or adjustable rate | Monthly PMI premiums with less than 20% down; can be paid as single-premium PMI at closing | Anyone can apply; must meet loan size limits and generally have a DTI ratio at or below 45% |
| FHA loan | 580 with 3.5% down, 500 with 10% down | 3.5% | Upfront MIP of 1.75% plus monthly MIP payments (either for life of loan or first 11 years, depending on down payment size) | Anyone can apply; must generally have a DTI ratio at or below 43% (sometimes up to 50% with compensating factors) |
| USDA loan[14][15] | 640 | 0% | No insurance | Must be purchasing an eligible rural property and meet household income limits |
| VA loan[16] | No minimum requirement, but lenders set their own minimums | 0% | No insurance | Must be an active-duty servicemember, veteran, or surviving spouse |
The right loan for you depends on your credit score, down payment savings, and other eligibility factors:
- Conventional loan: Conventional loans have stricter credit and DTI requirements, but they don’t have any upfront MIP and PMI is cancellable. You can get a conventional loan for a primary residence, second home, or investment property. According to Wilson, borrowers with stronger financial profiles — like higher credit scores and larger down payments — typically benefit from lower overall costs with conventional loans.
- VA loan: If you’re an eligible active-duty servicemember, veteran, or surviving spouse, you can get a VA loan with no down payment. VA loans also do not require mortgage insurance and rates are typically lower than those for FHA or conventional loans.[17] The VA does not set a credit score minimum to get a loan, but lenders may. If you qualify for a VA loan, it's often the best deal on the market.
- USDA loans: A USDA loan requires purchasing an eligible rural property and meeting income limits, which makes it harder to qualify for than an FHA loan. But if you do qualify, there is no down payment requirement. It's worth exploring for borrowers looking to buy in rural areas.
Is an FHA loan right for you?
An FHA loan can be the right option for many borrowers, but determining if it’s right for you involves weighing its pros and cons.
Advantages of an FHA loan
Here are some advantages of an FHA loan that can make them a great product for many home buyers:
- Lower credit score floor: FHA loans require a minimum 580 credit score for 3.5% down — or just 500 with 10% down. Because the FHA standardizes pricing, costs are less sensitive to credit score differences than with conventional loans, which can benefit borrowers still building their credit.
- More flexible DTI: In some cases, the FHA allows for DTI ratios as high as 50% with compensating factors like a strong credit score and significant cash reserves.[18] For borrowers with significant student loans or credit card debt, an FHA loan can offer more flexibility than conventional financing.
- Flexible down payment options: While you need to make at least a 3.5% down payment, all of that money doesn’t need to come from your pocket. FHA loans allow you to use gift funds and down payment assistance from local and state-specific programs to cover the full minimum down payment.[19]
- Roll renovation costs into your loan: With an FHA 203(k) loan, you can roll the costs of the home purchase and any necessary renovations into one loan, making it convenient for an older home or fixer-upper.
- Shorter waiting periods after hardship: FHA waiting periods are two years after bankruptcy and three years after foreclosure, shorter than the conventional loan equivalents of 2–4 years and 3–7 years respectively.[10][20]
Disadvantages of an FHA loan
While FHA loans make homeownership accessible for many borrowers, they still have some drawbacks worth noting:
- Mortgage insurance for potentially the entire loan term: With less than 10% down, you'll pay annual MIP for the entire loan term — and the UFMIP on top of that. The only exit is refinancing into a conventional loan. "As a general rule, PMI on conventional mortgages for a borrower with a 700 credit score or higher will be the same or cheaper than FHA," says Wilson.
- May lose money if you refinance soon: The 1.75% upfront premium is largely unrecoverable if you refinance within a few years. Run the numbers carefully if refinancing is part of your plan.
- More appraisal hoops to jump through: The FHA appraisal isn’t just to determine a home’s value. It’s also because the FHA sets minimum property requirements around a home’s safety and habitability that properties for sale must meet for an FHA loan to close. Sellers of older homes may be reluctant to accept FHA offers, knowing that flagged issues could require repairs before the loan can close.
- Lower loan limits: The FHA loan limit for 2026 is $541,287 in low-cost areas. This maximum loan amount is much lower than the $832,750 limit for conventional loans, which could be problematic in more expensive markets.[21]
- Restricted to primary residences: Unlike a conventional loan, which can be used for second homes and investment properties, an FHA loan can only finance a primary residence.
“If you’re newer to homebuying, putting less money down, or still building or repairing your credit, an FHA mortgage can often be the more cost-effective and accessible option,” says Wilson. “On the other hand, if you have strong credit and a solid financial profile, a conventional loan will typically offer better long-term savings.”
An FHA loan may also be the right fit if you're planning to use gift funds or down payment assistance, or if you're purchasing a fixer-upper and qualify for the 203(k) renovation loan.
How to get an FHA loan
When you’re ready to get a mortgage, consider these tips to help make landing the best deal on an FHA loan easier:
- Check your credit score: Know where you stand before approaching lenders. A score below 580 means you'll need 10% down; scores in the 610–620 range might be worth improving before applying. A loan officer can advise on what changes would have the most impact on your rate.
- Know your DTI: To find your DTI, divide all your monthly debt by your monthly gross income and multiply by 100. For example, if your total monthly debt payments are $2,300, and your monthly gross income is $5,500, your DTI ratio is 42% This helps you gauge where you stand before a lender runs the numbers.
- Shop at least two or three lenders: Wilson notes that it’s very important to shop multiple lenders for an FHA loan. “It’s not that the rates and terms will be different amongst the lenders as those are set by the Federal Housing Agency, it’s the cost of the rates,” he says. He recommends comparing total origination charges across lenders. A mortgage broker can shop around for you and find lenders whose requirements match your profile.
- Ask how much cash you’ll need at closing: When you get an FHA loan, you’ll need to bring cash to the closing table to cover your down payment and closing costs — which typically amount to 2-5% of the loan total. On a $400,000 home with 3.5% down, that's $14,000 down plus roughly $11,580 in closing costs at 3% — about $25,580 total. Ask your lender for this number upfront.
- Request Loan Estimates for both FHA and conventional: A written side-by-side comparison makes the true cost difference clear. Don't rely on verbal estimates alone.
Talk to a loan officer to see if a conventional is right for you
Whether you’re thinking of applying for a mortgage today or in a few months, connecting with a loan officer now can help. An experienced loan officer can look at your current financial profile and advise you on your mortgage options.
At Best Interest Financial, we provide personalized, white-glove service that big-box and automated lenders can’t. With over 80 years of combined experience and billions in closed loans, our loan officers have the expertise to help identify creative financing possibilities that others miss.
No matter what your timeline is, we can help you develop a strategy to reach your goals and get you on the path to home ownership. Get a free, 60-second quote from Best Interest today to learn more.
FAQ
Is an FHA loan only for first-time buyers?
No, repeat home buyers can also get an FHA loan, but they must be buying a primary residence. This misconception likely comes from buyers who qualify for FHA loans also qualifying for down payment assistance programs, many of which are targeted at first-time buyers.
Can I use an FHA loan for an investment property or second home?
No. You can only use FHA loans for primary residences. If you're buying a second home or investment property, you'll need a conventional loan.
Can I refinance out of an FHA loan into a conventional loan?
Yes — and for many FHA borrowers, this is the long-term plan. Once you've built 20% equity, refinancing into a conventional loan eliminates MIP. Having 20% equity also means that you won’t have to pay PMI premiums on your new conventional loan. Whether it makes financial sense to pay for a refinance depends on the current rates, how much equity you've built, and how much longer you plan to stay in the home.