FHA loan
A mortgage insured by the Federal Housing Administration that allows smaller down payments and lower credit scores than many conventional loans.
What it means
An FHA loan is made by a private lender but insured by the Federal Housing Administration, which reduces the lender’s risk. Borrowers with a credit score of at least 580 can put as little as 3.5% down; those with scores from 500 to 579 generally need 10% down. Lenders may set stricter minimums.
Borrowers pay an upfront mortgage insurance premium plus an annual premium built into the monthly payment. For many borrowers this insurance lasts for the life of the loan unless they refinance into a different loan. FHA loans also have loan limits that vary by county. They tend to suit first-time buyers and those rebuilding credit.
Example
Suppose a buyer with a qualifying score purchases a $300,000 home with 3.5% down, or $10,500, and borrows $289,500. At an illustrative 6% for 30 years, principal and interest is about $1,735.70 a month, before mortgage insurance, taxes and homeowners insurance.
How it’s used
- First-time buyers with limited savings
- Borrowers with modest or recovering credit
- Buyers with higher debt-to-income ratios
Strengths and weaknesses
Strengths
- Low minimum down payment
- More forgiving credit requirements
- Down payment can often come from gift funds
Weaknesses
- Mortgage insurance is required and often lasts the life of the loan
- County loan limits cap the amount
- Property must meet FHA appraisal standards
Good to know
- Compare total cost, including mortgage insurance, against a low-down-payment conventional loan.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.