What is FHA Loan?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). Because the government insures the loan, lenders are protected against default losses, which allows them to offer more lenient underwriting standards. FHA loans are specifically designed to make homeownership accessible to low-to-moderate-income and first-time homebuyers who have limited savings or lower credit scores that would disqualify them from conventional financing.

To qualify for an FHA loan with the minimum down payment of 3.5%, a borrower must have a credit score of 580 or higher. Borrowers with credit scores between 500 and 579 can still qualify but must make a minimum down payment of 10%. Additionally, the home must serve as the borrower's primary residence and pass a strict safety inspection conducted by an FHA-approved appraiser. FHA loans are subject to regional limits that are recalculated annually; for 2026, the national low-cost area floor is set at $541,287, and the high-cost ceiling stands at $1,249,125.

Unlike conventional loans where private mortgage insurance (PMI) is cancelable, FHA loans require two distinct types of Mortgage Insurance Premiums (MIP) regardless of the down payment size. The Upfront Mortgage Insurance Premium (UFMIP) is equal to 1.75% of the loan amount, paid at closing or rolled into the principal balance. The annual MIP (billed monthly) ranges from 0.40% to 0.75% depending on the loan amount and term. If a borrower puts down less than 10%, the monthly MIP remains mandatory for the entire life of the loan. The only way to eliminate FHA mortgage insurance with a low down payment is to refinance the mortgage into a conventional loan once the homeowner accumulates 20% equity.