Opening the door to homeownership: FHA loans explained

FHA loans are designed to make homeownership more accessible, especially for buyers who may not qualify for conventional financing. With lower down payment requirements and more flexible credit guidelines, they can help renters make the move to owning a home sooner than they might expect.

In fact, about 80 percent of FHA loans went to first-time home buyers in 2025, yet many buyers and sellers don’t know how these loans work.

What is an FHA mortgage loan?

FHA stands for Federal Housing Administration, a federal agency created by Congress in 1934 to help revive a housing market that had been decimated by the Great Depression.

But this federal agency, which is part of the Department of Housing and Urban Development (HUD), does not provide the mortgage loans that bear its name. Instead, the FHA provides mortgage insurance to the lenders who underwrite mortgage loans. This insurance can reimburse lenders if the borrower fails to repay the loan, lowering the risk lenders take when they extend credit to borrowers.

When mortgage companies face less risk, they can approve loans with lower down payments and lower interest rates, even for borrowers who may not qualify for a conventional loan.

The end result: Easier access to home financing for buyers who bring lower down payments and less-than-perfect credit scores or other challenges that would make conventional loans hard to get.

...in as little as 3 minutes – no credit impact

How does an FHA loan work?

FHA mortgage insurance makes FHA loans work. This insurance policy is designed to reimburse the lender if the borrower defaults on the loan.

The FHA does not insure mortgages for free. The homebuyer helps pay for the coverage through two premiums:

• Upfront MIP (UFMIP): This one-time upfront fee usually adds 1.75 percent of the loan amount. For a $300,000 loan, that’s a fee of $5,250. Homebuyers can add this fee to their loan amount.
• Annual MIP (AMIP): This premium gets added to the loan’s interest rate. This fee varies by down payment and loan term, but most 30-year borrowers pay a fee of 0.55 percent a year. On a $300,000 loan, this adds about $138 a month to the mortgage payment. This amount can go down each year as the loan balance goes down.

At first glance, these fees may seem punitive. But even after paying these fees, many buyers can still save with an FHA loan compared to a conventional mortgage loan. Since conventional loans do not come with federal insurance, they rely more on the borrower’s credentials.

This means borrowers who barely qualify for a conventional loan often pay higher mortgage rates than borrowers who bring higher credit scores and large down payments. Plus, conventional loans require their own mortgage insurance called private mortgage insurance (PMI). For homebuyers who make minimum down payments on a conventional loan, PMI can exceed the FHA’s mortgage insurance fees.

Every borrower is different. The best way to see your real costs is to get a preapproval. Better’s preapproval requires only a soft credit check and won’t hurt your credit score. You can see what you qualify for in as little as 3 minutes with no risk.

FHA loan requirements and eligibility

To qualify for an FHA loan, a borrower must meet the FHA’s rules for:

• Credit score: A borrower with a FICO score of 580 can qualify a loan with the FHA’s minimum down payment of 3.5 percent. Some lenders will approve FHA loans for borrowers with FICOs below 580 – possibly as low as 500 – if the buyer pays 10 percent down.
• Down payment: Home buyers pay at least 3.5 percent down. That’s $3,500 for every $100,000 in the home price, or $10,500 for a $300,000 home. Credit scores below 580 require down payments of 10 percent.
• Debt-to-income ratio: DTI measures whether a borrower can afford the monthly payments by comparing household debt payments, including the new mortgage payment, to household income. The standard rule is 43 percent DTI, but some lenders, like Better, can push this higher in some cases.

Also, borrowers must show they have steady employment, typically by sharing W2 forms and pay stubs from work. Lenders may also ask to see recent bank statements so they’ll know where down payment and closing cost money is coming from.

The home must qualify for the loan, too

Not every home will qualify for FHA financing. The home must:

• Pass the FHA inspection: An FHA appraiser will check out the home to make sure it meets minimum FHA requirements for structural soundness and safe occupancy. The presence of toxins like lead paint, pests, or rotten wood will likely fail an inspection.
• Serve as the borrower’s primary residence**: FHA insures loans only when the borrower plans to live in the home full-time. Vacation homes and investment properties won’t qualify, though it is possible to buy a multi-unit property, such as a duplex, if you live in one of the units.
• Not cost too much: In most U.S. counties, single-family homes that require loans higher than $541,287 aren’t eligible for FHA financing in 2026. This limit typically changes from year to year, and the limit goes higher in places where housing costs more. FHA loan limits can go as high as $1,249,125 for a single-family home and $2,402,625 for a four-unit complex in high value markets.

Most homes that attract first-time homebuyers fall within these guidelines for residence and price. But the FHA inspection can exclude properties, especially older homes.

Types of FHA loans

The Federal Housing Administration insures several types of loans, including:

Fixed-rate FHA loans

These are the most common FHA mortgages. They lock in a mortgage rate for the entire 15- or 30-year term, allowing more predictable monthly payments.

Adjustable-rate FHA loans (ARMs)

These mortgages work like fixed-rate loans, except the mortgage rate can change from year to year. ARMs tend to offer lower introductory rates compared to fixed-rate FHA loans. Buyers who expect rates to fall over the next few years, or buyers who plan to sell or refinance the home before the loan’s rate starts to change, may want an FHA ARM.

FHA 203(k) rehab loans

This special loan type works well for fixer-uppers. 203(k) combines a loan for buying the home with a loan for renovations. To get approved, the buyer has to see a plan and a budget for the renovation project. The borrower must also work with an FHA-approved contractor.

FHA Streamline Refinance

Homeowners who already have an FHA loan can get a new FHA loan on the home through Streamline Refinancing. Many borrowers can skip a lot of the qualifying steps since they’ve already been approved by the FHA. This lowers closing costs compared to other refinances. An FHA Streamline Refi works well for buyers who want to lock in lower market rates or get out of an ARM before its rate changes.

FHA Energy Efficient Mortgage (EEM)

This loan finances energy-efficient upgrades. Like the 203(k) program, it can be combined with a purchase or a refinance.

Pros and cons of FHA loans

Is the FHA loan program right for you? These pros and cons can help answer:

Pros of FHA loans

• Borrowers could get approved with lower credit scores and lower down payments: Most conventional loans require FICOs of at least 620, and buyers with scores that low often need to exceed minimum down payments. FHA borrowers with scores as low as 580 can still get approved with only 3.5 percent down.
• Higher debt thresholds can help borrowers with lower incomes: FHA lenders can allow higher debt-to-income ratios. Some borrowers can spend 45 to 50 percent of their gross monthly income on debt, including the house payment. This helps borrowers who have student loan debt, car payments, or lower incomes get mortgage approved.
• Gift funds are allowed: Homebuyers don’t have to use their own money for the down payment. They can use money donated by relatives and close friends, as long as the donor writes a letter confirming the money is a gift and not a loan.

Cons of FHA loans

• FHA insurance premiums can last the life of the loan: Unlike private mortgage insurance on a conventional loan, which homeowners can cancel after they pay down their loan balance by 20 percent, the FHA’s annual mortgage insurance premium usually continues throughout the life of the loan. (Borrowers who put 10 percent or more down can cancel this fee after 11 years.)
• Property requirements can scare off sellers: Some home sellers worry their homes won’t pass the FHA inspection. These sellers may decide not to accept FHA loans from buyers, limiting inventory for FHA buyers.
• Can cost more for well qualified buyers: Unlike a conventional mortgage, an FHA loan won’t usually reward borrowers who have higher credit scores with lower rates. Many borrowers with higher credit scores and large down payments are more likely to get lower mortgage rates on conventional than FHA.

Related: See a comprehensive list of pros and cons of FHA loans here.

FHA loans vs conventional loans

Conventional and FHA loans finance most new homes in the U.S. How do these loan types compare side by side?

...in as little as 3 minutes – no credit impact

How to get an FHA loan?

The FHA authorizes hundreds of lenders, including Better Mortgage, to approve FHA loans for borrowers, so getting an FHA loan is a lot like getting any other type of mortgage.

Step 1. Contact a lender experienced with FHA loans

Start with a lender familiar with FHA guidelines. Better offers a 100% digital mortgage application process, making it easy to check eligibility, compare options, and see if you qualify for an FHA loan — all online.

Step 2. Check your eligibility with a preapproval

A mortgage preapproval shows where you stand with a lender without going through a full application. Better’s preapproval can show what you qualify for in as little as three minutes.

Step 3. Find a home in your price range

Preapproval shows how much you could borrow, which shows your price range for home shopping. Work with a real estate agent to negotiate a contract. Once you’re under contract, it’s time to make the mortgage application official.

Related: Use this mortgage calculator to estimate monthly payments.

Step 4. Proceed to loan approval and closing

Follow your loan consultant's instructions and respond quickly to requests for more information. Along with the FHA-required inspection, buyers should also get their own home inspection. The FHA inspection checks for safety and stability; a private inspection checks everything.

Is FHA your path to homeownership?

Home buyers who already have strong credit and large down payments can often save money with a conventional loan. For instance, someone who’s selling an existing home and using the money to make a 40 percent down payment on a new home may save money with conventional borrowing.

But for buyers who are looking in from the outside of the housing market, FHA loans can get them through the first door.

Is FHA right for you? The answer depends on your unique financial situation.

...in as little as 3 minutes – no credit impact