What is an FHA Loan?
An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration. FHA loans are designed for low-to-moderate-income borrowers who may have lower credit scores. These loans require lower minimum down payments than many conventional loans.
How Do FHA Loans Work?
FHA loans are backed by the government, which reduces the risk for lenders. Because of this, lenders offer more favorable terms such as lower interest rates and more flexible qualification standards.
Why Are FHA Loans Attractive?
- Low down payment options (as low as 3.5%)
- Flexible credit score requirements
- Higher debt-to-income ratio allowances
- Government backing
FHA Loan Requirements in 2025
- Minimum credit score of 580 for 3.5% down
- Debt-to-income (DTI) ratio below 43%
- Steady employment and income
- Property must be the borrower's primary residence
FHA Loan Down Payments
Borrowers with credit scores of 580 or higher can qualify for an FHA loan with a 3.5% down payment. If your credit score is between 500–579, you may still qualify but will need a 10% down payment.
FHA Mortgage Insurance
All FHA loans require two types of mortgage insurance:
- Upfront Mortgage Insurance Premium (UFMIP): 1.75% of the loan amount
- Annual Mortgage Insurance Premium (MIP): Paid monthly and varies by loan amount and term
FHA Credit Score Requirements
The minimum credit score to qualify for an FHA loan is 500. However, borrowers with a score of 580 or above benefit from a lower down payment requirement.
FHA DTI and How to Calculate It
DTI (Debt-to-Income) is calculated by dividing your total monthly debt payments by your gross monthly income. FHA guidelines typically allow a DTI of up to 43%.
| Monthly Debt | Monthly Income | DTI Ratio |
|---|---|---|
| $1,500 | $4,000 | 37.5% |
FHA Income Requirements
There is no minimum income requirement, but borrowers must prove a steady income and employment history for the past two years.
FHA Loan Limits (2025)
Loan limits vary by county and are adjusted annually based on housing costs. In 2025, the standard FHA loan limit is $498,257 in most areas, with higher limits in high-cost regions.
Types of FHA Home Loans
- FHA 203(b): Standard fixed-rate loans
- FHA 203(k): For home renovation
- FHA Energy Efficient Mortgage
- FHA Reverse Mortgages (HECM)
FHA Interest Rates in 2025
FHA interest rates are competitive due to the government guarantee. Rates in 2025 are expected to range from 6.0% to 6.5% depending on the lender and borrower profile.
FHA Rate-and-Term Refinance
This type of refinancing allows borrowers to refinance their existing FHA loan into a new one with different terms, potentially lowering monthly payments.
FHA Cash-Out Refinance
Borrowers can refinance their FHA loan and extract cash from their home equity. A minimum credit score of 600 is typically required.
Is an FHA Loan Right for You?
If you’re a first-time buyer with less-than-perfect credit or limited savings for a down payment, FHA loans can be a great starting point. Consider other options and speak to a loan officer to compare.
FHA Loan FAQs
- Can I have a co-borrower? Yes, but they must also meet FHA guidelines.
- Can I use gift funds for the down payment? Yes, from an approved source.
- Can I have more than one FHA loan? Generally, no, unless relocating or other exceptions apply.