FHA loans let you buy a home with as little as 3.5% down, and some programs cover that percentage too

An FHA loan is a mortgage insured by the Federal Housing Administration, a division of the Department of Housing and Urban Development. The key difference from a conventional loan: FHA allows you to put down 3.5% of the purchase price instead of 10% to 20%. If you are buying a $200,000 home, you need $7,000 down instead of $20,000 to $40,000. The tradeoff is that you pay mortgage insurance — a monthly fee that protects the lender if you stop paying.

Some down payment assistance programs will cover that 3.5% for you, meaning you could theoretically close with no money from your own pocket. These are usually offered by nonprofits, state housing finance agencies, or local governments, and they vary widely by location. Your lender can tell you which programs work with FHA loans in your area.

Key Takeaways

  • FHA loans require a minimum 3.5% down payment, but down payment assistance programs in your state or county may cover that amount.
  • You must have a credit score of at least 580 to get an FHA loan with 3.5% down; scores between 500 and 579 require 10% down.
  • Mortgage insurance is mandatory on FHA loans and costs between 0.55% and 1.3% of the loan amount annually, added to your monthly payment.
  • Your debt-to-income ratio cannot exceed 50%, meaning your total monthly debt payments (including the new mortgage) cannot be more than half your gross income.
  • The home must be your primary residence and must pass an FHA inspection, which is stricter than a standard home inspection.

Credit score and debt requirements for FHA approval

FHA loans have lower credit score requirements than conventional mortgages. You need a minimum score of 580 to put down 3.5%. If your score is between 500 and 579, you can still get an FHA loan, but you must put down 10% instead of 3.5%. Scores below 500 are not accepted.

Your debt-to-income ratio (DTI) is what lenders look at most closely. This is your total monthly debt payments divided by your gross monthly income. For FHA loans, your DTI cannot exceed 50%. If you earn $4,000 a month gross, your total debt payments — credit cards, car loans, student loans, and the new mortgage — cannot exceed $2,000. Most lenders prefer to see DTI at 43% or lower, but FHA allows up to 50% if your credit and savings history are strong.

You will also need to show that you have not had a bankruptcy, foreclosure, or major delinquency in the last two years. If you have, you may still may have access to, but the lender will want to see evidence that the problem was temporary and you have recovered.

How mortgage insurance works on FHA loans

Because FHA loans carry more risk for lenders (lower down payment, lower credit scores allowed), you pay mortgage insurance premiums (MIP). There are two parts: an upfront premium and an annual premium.

The upfront premium is 1.75% of the loan amount and is usually rolled into your mortgage, meaning you do not pay it at closing — you pay it over the life of the loan. On a $200,000 loan, that is $3,500 added to what you owe. The annual premium ranges from 0.55% to 1.3% of the loan amount per year, depending on your down payment and loan term. This is divided into 12 monthly payments and added to your mortgage payment.

On a $200,000 loan with 3.5% down and a 30-year term, annual MIP is roughly $1,100 to $2,600 per year, or $92 to $217 per month. You cannot remove this insurance until you have paid down the loan to 80% of the home's original value, which typically takes 11 years on a 30-year mortgage. If you put down 10% or more, you can remove MIP after 11 years; if you put down less than 10%, it stays for the life of the loan.

Down payment assistance programs that work with FHA loans

Several types of programs can cover your 3.5% down payment. State housing finance agencies run grant and forgivable loan programs in most states — these give you money that does not have to be repaid, or that is forgiven after you stay in the home for a set period. Your state's housing finance agency website lists current programs and income limits.

Nonprofit organizations like NeighborWorks, Habitat for Humanity, and local community development corporations offer down payment help, usually paired with homebuyer education classes. Some require you to complete a course before you can receive funds. Employer programs exist at larger companies and some government agencies — ask your HR department whether yours offers down payment assistance.

Local government programs run by city or county housing departments often have the most flexible terms, though funding is limited and programs may close when money runs out. Call your city or county housing authority to ask what is currently open. You can also dial 211 (a national helpline) and ask for down payment assistance in your area — they maintain a database of active programs.

Most programs require that you complete a homebuyer education course, have a credit score above 620, and have a debt-to-income ratio below 50%. Some programs are income-restricted, meaning you must earn below a certain threshold (often 80% of your area's median income). Down payment assistance is not the same as a grant — some programs are forgivable loans that you must repay if you sell the home within a set time, usually 5 to 10 years.

The FHA inspection and appraisal process

FHA loans require both an appraisal and an inspection. The appraisal is done by a licensed appraiser and confirms that the home is worth at least what you are paying for it. This protects the lender. The FHA inspection is stricter than a standard home inspection and checks for safety, structural soundness, and code compliance. The home must meet FHA Minimum Property Standards.

Common reasons homes fail FHA inspection: missing handrails on stairs, exposed wiring, roof damage, foundation cracks, mold, lead paint (in homes built before 1978), or inoperable utilities. If the home fails, the seller must repair the issues before closing, or you can renegotiate the price. You cannot close on an FHA loan until the home passes inspection.

The appraisal and inspection are separate processes and both cost money — typically $400 to $700 combined. These are usually paid by you upfront, though some lenders roll them into the loan. Ask your lender what is included in your loan estimate.

What happens at closing with an FHA loan

At closing, you will sign loan documents, pay closing costs, and transfer the down payment to the escrow account. Closing costs on an FHA loan typically run 2% to 5% of the loan amount — on a $200,000 loan, that is $4,000 to $10,000. These cover the appraisal, title search, title insurance, lender fees, and other services.

FHA rules limit how much of your closing costs the seller can pay. The seller can cover up to 6% of your closing costs, which means if your closing costs are $6,000 and the seller pays 6%, you pay $0. If closing costs are $8,000, the seller covers $6,000 and you pay $2,000. This is one reason FHA loans are popular for first-time buyers with limited savings.

You will also need to show proof of homeowners insurance before closing — FHA requires this. The insurance premium is usually paid at closing and then monthly with your mortgage payment. You will also pay property taxes and possibly HOA fees, depending on the home.

Common reasons FHA loan applications are denied

The most common reason for denial is a debt-to-income ratio above 50%. If you have recent late payments, collections accounts, or a recent bankruptcy (within two years), denial is likely unless you can show strong mitigating circumstances. A credit score below 580 will also result in denial for a 3.5% down loan.

Employment gaps or income that cannot be verified will slow or stop your application. Lenders want to see two years of employment history and will verify your income with your employer and tax returns. If you are self-employed, you will need two years of tax returns and possibly a CPA letter.

The home itself can cause denial if it fails FHA inspection or appraises for less than the purchase price. If the appraisal comes in low, you have three options: renegotiate the price with the seller, put down more money, or walk away. You cannot close for more than the appraised value on an FHA loan.

Frequently Asked Questions

Can I use down payment assistance if I already have savings?

Yes. Down payment assistance programs do not require you to be broke — they require you to meet income and credit thresholds. If you have $5,000 saved and a program covers your 3.5% down payment, you can use your savings for closing costs instead. Some programs do require that you contribute some of your own money, usually 1% to 2% of the purchase price.

What is the difference between an FHA loan and a conventional loan?

FHA loans allow 3.5% down and accept credit scores as low as 580. Conventional loans typically require 5% to 20% down and credit scores of 620 or higher. FHA loans have mortgage insurance that you cannot remove (if you put down less than 10%), while conventional loans allow you to remove private mortgage insurance once you reach 20% equity. FHA loans are often cheaper upfront but more expensive over time.

Can I get an FHA loan if I have had a foreclosure?

Yes, but you must wait at least three years from the foreclosure date. Some lenders require five years. You will also need to explain what caused the foreclosure and show that your finances have stabilized. A letter from your employer confirming stable employment and proof of on-time payments for the past two years will strengthen your application.

Do I have to pay mortgage insurance for the entire loan?

If you put down 10% or more, you can remove mortgage insurance after 11 years of payments. If you put down less than 10% (including the 3.5% minimum), mortgage insurance stays for the life of the loan. You can refinance into a conventional loan once you have 20% equity, which would remove the insurance.

What if my down payment assistance is a forgivable loan?

A forgivable loan means you do not have to repay it as long as you stay in the home for the forgiveness period, usually 5 to 10 years. If you sell or refinance before that period ends, you must repay the full amount. Ask the program for the exact terms before you accept the funds — some programs forgive a percentage each year, while others forgive the entire amount at once after the period ends.