What an FHA down payment is

An FHA down payment is the money you put toward a home purchase when you borrow through the Federal Housing Administration loan program. The FHA itself does not lend money — instead, it insures loans made by banks and mortgage lenders. That insurance protects the lender if you stop paying, which is why FHA loans allow down payments as low as 3.5% of the home's purchase price. A conventional loan typically requires 5% to 20% down.

The catch is that you pay for that insurance. When you put down less than 20%, the lender adds mortgage insurance to your monthly payment. With an FHA loan, you pay both an upfront mortgage insurance premium (usually 1.75% of the loan amount, rolled into what you borrow) and an annual premium (0.55% to 0.80% of the loan balance per year, depending on the loan term and your down payment size). That insurance stays on your loan for the life of the loan if you put down less than 10%, or until you reach 22% equity if you put down 10% or more.

FHA loans have income limits and property limits that vary by county. The property limit is the maximum price of a home you can buy — it ranges from roughly $472,000 to $1.08 million depending on where you live. You also cannot have missed mortgage or rent payments in the past two years, and your debt-to-income ratio (total monthly debt divided by gross monthly income) usually cannot exceed 43%.

Key Takeaways

  • FHA down payments start at 3.5% of the purchase price, compared to 5% to 20% for conventional loans.
  • You pay mortgage insurance on top of your monthly payment — an upfront premium of 1.75% rolled into the loan, plus an annual premium of 0.55% to 0.80% per year.
  • The mortgage insurance stays for the life of the loan if your down payment is under 10%, or until you own 22% of the home if you put down 10% or more.
  • FHA loans have income and property limits that vary by county, and you must have no missed mortgage or rent payments in the past two years.

How much you actually need to save

The 3.5% down payment is only part of what you need at closing. You also pay closing costs, which typically run 2% to 5% of the loan amount. These include the appraisal, title search, title insurance, attorney fees, recording fees, and lender fees. On a $300,000 home with a 3.5% down payment, you would put down $10,500, but closing costs could add another $6,000 to $15,000.

Some of those closing costs can be paid by the seller or rolled into your loan, which reduces what you need to bring to closing. Ask your lender which costs can be covered this way. You will also need to set aside money for a home inspection (typically $300 to $500), which is separate from the appraisal and is not required by the lender but is strongly recommended.

The FHA allows gifts from family members to cover your down payment and closing costs, as long as the gift is documented in writing and the giver has no expectation of repayment. The gift letter must state the relationship, the amount, and that it is a gift, not a loan. This is useful if you do not have the full amount saved yourself.

Down payment size and your monthly payment

The size of your down payment directly affects your mortgage insurance cost. If you put down 3.5%, your annual mortgage insurance premium is 0.80% of the loan balance. If you put down 10%, it drops to 0.55% per year. The difference is small on paper but adds up over time — on a $300,000 loan, that is roughly $60 per month.

Putting down more than 3.5% also means you borrow less, so your base mortgage payment is lower. A larger down payment reduces both the principal you owe and the insurance you pay, but it also means saving more money before you buy. The trade-off is between buying sooner with a smaller down payment or waiting longer to put down more and pay less over time.

You can also make a larger down payment after you close the loan by paying extra toward principal, which will eventually remove the mortgage insurance once you reach 22% equity. However, the lender must agree to remove it — some lenders require you to request it in writing and may require a new appraisal to confirm the home's current value.

Who qualifies for an FHA loan

The FHA does not have a minimum credit score requirement, but most lenders require a score of 580 or higher to offer the 3.5% down payment option. If your score is between 500 and 579, some lenders will still work with you but may require a 10% down payment instead. You must have a valid Social Security number and be a U.S. citizen or permanent resident.

Your debt-to-income ratio cannot exceed 43% in most cases, though some lenders will go to 50% if you have strong compensating factors like a large savings account or a history of on-time payments. Debt includes car loans, student loans, credit cards, child support, and the new mortgage payment itself. If you earn $5,000 per month, your total monthly debt (including the new mortgage) should not exceed $2,150.

You cannot have filed for bankruptcy within the past two years, and you must have no missed mortgage or rent payments in the past two years. If you have a foreclosure or short sale in your history, you must wait three years from the date it was completed before you can get an FHA loan. A divorce or job loss does not automatically disqualify you, but the lender will ask for documentation of what happened and proof that your situation has stabilized.

The property must meet FHA standards

The home you buy must pass an FHA appraisal, which is more detailed than a standard appraisal. The appraiser checks that the property is safe, structurally sound, and sanitary. Common reasons a home fails FHA appraisal include missing handrails, exposed wiring, mold, a roof with less than two years of life remaining, or a basement that floods. The seller is responsible for fixing these issues before closing, not you.

The property must also be your primary residence — you cannot use an FHA loan to buy a second home or investment property. The home can be a single-family house, a condo, a townhouse, or a manufactured home built after 1976, but it must meet FHA property standards. If you are buying a condo, the building itself must be FHA-approved, which means the FHA has determined that enough of the units are owner-occupied and the building is financially stable.

How to start the FHA loan process

Contact a mortgage lender or bank directly — you do not need to go through a broker or third party. Ask if they offer FHA loans and request a pre-qualification or pre-approval. Pre-qualification is informal and based on what you tell them; pre-approval involves a credit check and verification of income and assets. Pre-approval takes a few days and shows sellers that you are a serious buyer.

Bring recent pay stubs, W-2s or tax returns (usually two years), bank statements, and a list of debts. The lender will calculate your debt-to-income ratio and tell you the maximum loan amount you can borrow. Once you are pre-approved, you can start house hunting within your price range. When you find a home and make an offer, the lender will order the FHA appraisal, which typically takes one to two weeks.

If the appraisal comes back lower than the purchase price, you have three options: renegotiate the price with the seller, pay the difference out of pocket, or walk away. The lender will not lend more than the appraised value, so if the home appraises at $280,000 but you agreed to pay $300,000, you must cover that $20,000 gap yourself or the deal falls through.

Frequently Asked Questions

Can I use an FHA loan to buy a second home or investment property?

No. FHA loans are only for primary residences — the home where you will live most of the time. If you want to buy a rental property or a vacation home, you will need a conventional loan or an investment property loan, which typically requires a larger down payment and higher credit score.

What happens if I pay off my FHA loan early?

You can pay off an FHA loan at any time without penalty. The mortgage insurance premiums stop once the loan is paid in full. If you refinance into a conventional loan after you have built enough equity, you can also remove the mortgage insurance at that point.

Can I remove the mortgage insurance before the loan is paid off?

Yes, but only after you reach 22% equity in the home. At that point, you can request removal in writing. Some lenders require a new appraisal to confirm the home's value. If your down payment was 10% or more, the mortgage insurance is automatically removed once you reach 22% equity.

Do I need a co-signer for an FHA loan?

Not necessarily. If your credit score or debt-to-income ratio is borderline, a co-signer with stronger finances can help you get approved or may have access to for a better interest rate. The co-signer's income and debts are included in the calculation, so they must have a good credit score and low debt.

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

FHA loans allow lower down payments (3.5% vs. 5% to 20%), have more flexible credit requirements, and are easier to get if you have past financial problems. Conventional loans have no mortgage insurance if you put down 20%, lower interest rates if you have good credit, and no property limits. Choose based on your down payment size, credit score, and the price of the home you want to buy.