Is an FHA mortgage right for me?

Got little cash and bad credit? Some mortgage lenders may toss your mortgage application aside, but a Federal Housing Administration mortgage might be an option for you.

An FHA loan requires much less in upfront costs. The federal government insures the loans, lowering the lender's risk that it will not be repaid if the applicant defaults.

"FHA loans are like training wheels for building wealth," said Jackie Coffey, a Waxahachie, Texas-based real estate investor and educator. "They help you start strong, build confidence, and before you know it, you’re cruising toward your own version of the American dream."

Here's a look at the program, which is commonly used by first-time homebuyers struggling to save for a large down payment.

Applicants for an FHA mortgage typically face more favorable terms than those for a traditional loan. A borrower with a credit score of 580 or higher can qualify for a down payment as low as 3.5% of the total loan amount. Borrowers with lower credit scores can still obtain FHA loans, but the down payment requirement may increase to 10%.

Borrowers don’t need a specific income amount to qualify for an FHA loan, but they must demonstrate their ability to afford one. The FHA calculates what's known as the debt-to-income ratio. It’s the amount of long-term monthly loan payments borrowers can make compared to their monthly gross income.

Those monthly costs typically include student and car loans, as well as the minimum payment on credit cards. They also include the projected monthly payments that borrowers would have on the house they want to buy, including property taxes, homeowners insurance and private mortgage insurance. To qualify for an FHA loan, an applicant must have a debt-to-income ratio of 43% or less.

Pro tip: FHA loans have a limit that varies by the county where the house is located. For most counties in 2025, the maximum amount is $524,225. The limit can go up to $1,209,750 for high-cost areas. The FHA updates its limits annually. You can look up your county on the FHA's website under FHA Mortgage Limits.

FHA mortgages have stringent requirements, so they may not be suitable for everyone.

Borrowers must pay upfront mortgage insurance payments and monthly mortgage insurance premiums. Here's how they work:

• The amount you pay in mortgage insurance depends on the size of your loan, with your upfront mortgage insurance payment equal to 1.75% of your base loan amount. The upfront mortgage insurance payment amount is due at the time of closing, or you can have it financed as part of the loan.
  
• The annual premium for mortgage insurance is included as part of your monthly payment, rather than as an annual lump sum cost.

This insurance can be more costly than conventional private mortgage insurance. The special insurance for FHA loans can be canceled if the borrower has made a down payment of at least 10 percent and 11 years have passed since the loan origination. However, the FHA has lowered its private mortgage insurance costs in the last few years, making them more comparable to conventional loans, said Christina McCollum, a mortgage lender with Churchill Mortgage in Kennewick, Washington. "As long as you're under the loan limit requirement, it's a great fit for any eligible, first-time buyers."

To qualify for an FHA loan, the home must meet the FHA’s minimum property requirements. Borrowers must agree to live in the house for at least a year, and the property must meet certain standards, including:

• Safety: The house should be a safe and healthy environment for occupants.
• Security: The house should provide protection from outside elements, such as weather and crime.
• Structurally sound: The home should be sturdy without any structural defects.

When considering a condo purchase with an FHA loan, the property must meet additional requirements. For example, it must be in a building with at least five dwellings and be ready for occupancy. The lender assesses the property’s condition through a home appraisal after the buyer and seller have signed a purchase agreement. For house hunters unable to afford a 20% down payment, an FHA loan makes homeownership more accessible. "I love FHA loans because they turn someday into today," said Coffey. "You can stop renting and start building equity while you invest in your own future."

More on this topic:

FHA 203(k) loan: Buy and renovate fixer-uppers with one mortgage